Stock markets: Much needed correction
| Photo Credit:
Kesavan A N 1612@Chennai
When a bull market inflates stock valuations beyond reasonable bounds, it takes only one adverse event to trigger a reversal. When that event happens to be the world’s largest economy slapping arbitrary tariffs on all its trading partners and trying to ‘engineer’ a recession, the de-rating is bound to be swift and devastating.
This explains why the global markets’ reaction to Trump’s announcements has been so sharp. Between 2021 and 2024, many of these markets doubled or trebled in value, helped by revenge spending by consumers and the tide of liquidity unleashed by central banks to revive growth. Now Trump’s tariffs threaten to decimate that growth by shrinking global trade and slowing the world’s two largest economies. The Indian market has so far been among the resilient ones. The Nifty50’s 6 per cent fall year-to-date, is less than the Dow Jones’ 10 per cent fall, the Nasdaq 100’s 19 per cent decline, Nikkei 225’s 22 per cent fall and Shanghai’s 8 per cent retreat. Perhaps, the structure of the economy renders India less vulnerable to global trade wars and chaos. Services exports as of now have been spared of tariffs. Goods exports contribute 12 per cent of India’s GDP, of which 2 per cent is US-bound. Meanwhile, the sharp retreat in global oil prices is positive for India’s trade balance and inflation. Forecasters therefore estimate that India may be able to contain the dent to its real GDP to 50-70 basis points on growth estimates of 6.5-6.7 per cent for FY26. India’s stock market gains post-Covid have been fuelled mainly by domestic retail investors who haven’t panicked so far.
However, Indian households which have sunk their savings into stock markets since Covid, must guard against taking too sanguine a view of the economy or companies. Sectors such as IT could feel a second-order impact from a US slowdown, impacting wage growth and consumption. With over a fifth of Indian households now invested in stocks, a negative wealth effect can feed into the real economy via spending cutbacks. With the epicentre of this crisis in the US, it does not make much sense for Foreign Portfolio Investors (FPIs) to pull out of India to invest in dollar assets now. But their behaviour during past crises like the sub-prime collapse and taper tantrum suggests that this Pavlovian response cannot be ruled out.
The eventual outlook for Indian markets depends mainly on whether companies manage to deliver profit growth that justifies their stock valuations. This correction has levelled Nifty50 valuations from over 25 times to 20 times. But earnings growth in FY25 is expected to be in the single digits. As the ongoing correction is bringing about a healthy re-adjustment of valuations with earnings, regulators should resist any temptation to intervene. As the global meltdown widens, their main remit will be to ensure that India’s margining, payments and settlement systems function smoothly, to ensure that no systemic risks crop up in the financial markets.
Published on April 7, 2025
