Economy and Market Updates – Conference Call on 22 March 2025

Speakers: Manoj Trivedi, Ram Medury

Introduction

We recently hosted our monthly economic and market outlook discussion, diving deep into the evolving global landscape and investment implications. The session offered a panoramic view of current conditions, with special attention to how the established Trump administration is reshaping international trade dynamics.

The discussion built upon our recent analysis shared via podcast and blog posts, particularly regarding the significant tariff developments we’re witnessing. We expanded on these key points while providing fresh perspectives on market conditions, current valuations, and what these factors mean for investors navigating today’s complex environment.

On the portfolio front, we’ve observed some fluctuations, though it’s worth noting the markets have demonstrated resilience with a notable recovery over the past ten trading sessions. To keep investors informed, we’ve initiated a weekly market direction update, with the first installment sent yesterday. While our approach doesn’t center on technical analysis, these regular recaps offer valuable context on market performance and trends. the session concluded with an interactive Q&A segment, addressing questions submitted through our chat feature and email channels.

Economic Analysis

Liquidty

When analyzing market fundamentals, it’s essential to recognize that market direction is primarily driven by liquidity—the amount of money available in the market. In simple terms, when more money pursues a particular asset, that asset becomes more expensive. Conversely, when money exits an asset class, we see prices decline. This liquidity, or flow of money, is influenced by two critical factors. First and most obvious is the prospect of gain. Investors naturally allocate their hard-earned money to investments they expect will appreciate, thereby increasing their wealth. Essentially, money follows returns, with liquidity flowing toward opportunities that promise growth.

Our expectations regarding returns are guided to some extent by valuations, though these valuations themselves are quite subjective. When abundant money circulates in the market, everything appears relatively inexpensive. When money is scarce, everything seems expensive. This creates a cyclical relationship: valuations depend on liquidity, which is influenced by expected gains, which in turn are affected by valuations. This cycle is disrupted by the second factor impacting investment decisions—uncertainty versus clarity. In uncertain environments, investors often don’t know what action to take, leading to inaction as the default choice. When the prospect of gain becomes unclear, investors tend to play it safe until uncertainty dissipates, resulting in decreased liquidity.

Theory of Expectations

Another crucial concept to consider is the Theory of Expectations. This theory focuses not merely on whether an event is inherently good or bad, but rather on how actual results compare to prior expectations. When an event, such as an RBI monetary policy announcement or budget declaration, delivers outcomes that exceed expectations, markets typically respond positively. Conversely, disappointing results relative to expectations often trigger negative reactions. The actual event may be objectively good or bad, but market response is primarily determined by how reality compares to expectations.

US Economy

Looking at the US economic situation, we’ve witnessed significant uncertainty since President Trump took office. The White House has been unpredictable, with rapid policy changes as the administration works urgently to “make America great again.” These efforts have caused considerable global market fluctuations. Regarding tariffs specifically, it’s important to understand that increasing them won’t necessarily benefit America as intended. The United States cannot simply dictate terms and expect the rest of the world to comply without resistance. A trade war appears likely, with different countries responding in various ways. Some may reduce their tariffs to gain better access to US markets, while others may implement retaliatory measures, creating a situation with no clear winners.

Tariff Tantrums

If tariffs escalate as threatened, the US might experience stagflation—a particularly challenging economic condition characterized by inflation without growth, combined with rising unemployment. Recent US economic indicators already show concerning trends, including lower projected GDP growth, higher inflation forecasts, and expected increases in unemployment. Despite these negative signals, markets actually responded positively to the Federal Reserve’s recent dovish stance, which maintained the possibility of two more interest rate cuts this year. This reaction demonstrates the Theory of Expectations in practice, as markets had feared the Fed might roll back its rate cut plans entirely.

Indian Economy

In contrast to these US challenges, India’s economic indicators remain robust. GDP growth has rebounded to 6.2% in Q3 compared to 5.6% in Q2, reversing the falling trend observed since Q4 of last year. India continues to lead global growth as the fastest-growing major economy. Core inflation sits at the lower end of RBI’s acceptable band at 3.61%, while the current account deficit has improved to 1.2% of GDP from 2% in the previous quarter. Tax collections continue to rise, and regardless of political perspectives, economic activity related to Markam has been substantial and will likely contribute significantly to Q4 GDP growth. Overall, India’s macroeconomic parameters appear quite favorable.

US interest rate policy directly impacts India’s monetary options. If US rates remain elevated, the RBI cannot afford to substantially cut rates in India without risking capital outflows. This relationship is easily demonstrated through a simple example: an American investor with $100 earning 5% returns in the US might consider investing in India where rates are hypothetically 10%. After converting $100 to ₹10,000 and investing for one year at 10%, the amount grows to ₹11,000. However, if during this period the USD/INR exchange rate rises from 100 to 105 (reflecting 5% annual rupee depreciation), converting back to dollars yields only $104.76—a 4.76% return, which is less than the 5% available in the US. This illustrates the RBI’s dilemma, as lower interest rates in India relative to the US could discourage foreign capital inflows. The Fed’s recent indication that it may continue cutting rates creates space for the RBI to potentially lower rates given India’s otherwise strong economic fundamentals.

Implications of US Tariffs

Turning to the imminent trade tensions and tariff implementation, Trump’s higher tariffs are scheduled to take effect on April 2nd. Countries will respond differently based on their specific circumstances and trade relationships with the US. Some will agree to reduce their own tariffs, while others will retaliate with countermeasures. Each country’s approach will depend largely on its export-import profile with the United States. For India, Trump has highlighted that tariffs are quite high across numerous products. Rather than making dramatic public statements, the Indian government is quietly working with US counterparts to develop mutually beneficial solutions. We should be prepared for some tariff reductions, potentially affecting automobiles, defense items, energy, and roughly 30 other product categories. However, the government will likely resist cuts in sensitive sectors such as agricultural products.

The immediate future will undoubtedly be volatile as Trump continues making unilateral announcements almost daily. Many of these initiatives will face implementation challenges due to inadequate planning and unclear details, keeping markets and businesses on edge. Given the rapid pace of these announcements, Trump will likely exhaust most of his policy ideas within six months. Some initiatives will succeed while others fail, creating market turbulence throughout this period. However, our assessment based on macroeconomic analysis and understanding of major US trade relationships suggests that after this volatile period subsides, conditions will not differ dramatically from current circumstances. Certain sectors will experience disruption, but the overall economic landscape will likely remain relatively stable rather than undergoing radical transformation.

The potential US economic consequences of these policies could include increased cost structures, higher inflation, and lower GDP growth. Current forecasts project US GDP growth at approximately 1.7% in 2025, down significantly from 2.8% in 2024. Recent market indicators support these concerns, with FedEx stock—a reliable barometer of broader economic activity—dropping 10% in a single day. A Bank of America survey revealed that US fund managers are reducing their domestic market exposure by record amounts, with positions 23% underweight on average. These investors appear to be seeking alternative opportunities in markets like China, the eurozone, and India, which could eventually increase capital flows to these regions.

FII and DII Flows in India

Analyzing Foreign Institutional Investors (FIIs) versus Domestic Financial Institutions (DIIs), it’s worth noting that FII outflows from India aren’t unprecedented. Since January 2014, FIIs have been net sellers to the extent of 600,000 crores, acting as net sellers in eight out of eleven calendar years. Despite these outflows, the Nifty index has risen dramatically from around 6,200 in January 2014 to approximately 23,200 currently. This growth occurred because DIIs invested 13.6 lakh crores during the same period, more than double the FII outflows. This demonstrates that India is not overly dependent on foreign capital. In the current financial year alone (first eleven months), 2.63 lakh crores have been invested through Systematic Investment Plans (SIPs) in equity mutual funds, with 6.4 crore new SIPs registered compared to 4.62 crores discontinued. Indian investors continue to show faith in domestic markets, providing consistent capital inflows that support growth.

Market Valuations

Regarding market valuations, the Buffet indicator (market capitalization to GDP ratio) for India currently stands at approximately 1.14, which suggests slight overvaluation. However, the corresponding ratio for the US is much higher at 1.89, indicating significantly greater overvaluation in American markets. The Nifty PE ratio is currently above 23.6, while the median PE is 21.8, meaning the current level is actually below the historical median—contradicting claims that Indian markets are substantially overvalued. Much of the potential correction has already occurred, though further adjustments remain possible. China’s metrics present an interesting contrast, with a PE ratio of 9.97 and a Buffet indicator of just 67.5, making Chinese markets appear considerably undervalued even after recent gains. China’s growth rate of 4.6% compares favorably to many developed economies, and given that China’s economy is approximately three times larger than India’s, this growth rate represents substantial economic expansion. Combined with recent government stimulus measures, China will likely compete strongly with India for foreign investment funds.

The competition for foreign capital will depend partially on how China navigates US tariff policies. Another key difference between the two economies is their growth drivers: China’s growth traditionally relies on investment and exports with limited private consumption, while India’s growth is primarily consumption-led. Recent Indian budget and monetary policies aim to capitalize on and further strengthen this consumption-driven model.

Conclusions

Given this comprehensive analysis, several conclusions emerge. First, liquidity remains the primary driver of market movements. While FII outflows have negatively impacted Indian markets, continued bullishness from DIIs has provided crucial support. The pattern of FII money cycling in and out of the market will likely continue, with markets rising during inflow periods and correcting more gradually during outflows. Given Trump’s disruptive policies and China’s increasingly attractive valuations, substantial FII capital may not return to India immediately. Markets are currently experiencing a rebound, but we might see some retracement in the short term. However, consistent DII support should prevent any dramatic market collapse.

The next six months will likely be characterized by uncertainty, gradually giving way to greater clarity regarding future economic direction. As this clarity emerges, market conditions should improve. India’s consumption-driven economy, potentially supported by lower interest rates, should maintain the country’s position as the world’s fastest-growing major economy. With solid macroeconomic fundamentals firmly in place, maintaining long-term investments in India appears prudent despite short-term volatility.

Portfolio Updates

In response to recent events and evolving market conditions, we’ve made several strategic adjustments to our portfolios. One notable example involves an Agri Chemical company, which had exposure to the US agricultural market and faced potential tariff-related business impacts. After carefully monitoring the situation, we decided to exit this position in our managed portfolios. Interestingly, about a year and a half ago, there were significant concerns about Chinese competition entering this space, but we maintained our position at that time, and the stock subsequently recovered and performed well. However, given the current tariff environment, we’ve reassessed the risk-reward profile and determined that an exit was appropriate.

We’re also tracking several other stocks for potential exits. A Large Pharma represents one such case, where the company has experienced significant business challenges due to their cancer-related drug losing patent protection. This development has negatively impacted both top-line and bottom-line performance, causing the stock price to decline sharply following results announcements. Rather than reacting immediately to this drop, we’re strategically using any upward price movements as opportunities to gradually exit this position from our PMS portfolios, and we’ll communicate similar recommendations to our advisory clients.

A Cables & Wires company  provides another example of our tactical portfolio management. This company is a leader in the cable and wire segment, but the industry has recently experienced intensified competition with entries from major players including the Birla group, Ultratech Cement, and most recently Adani. The Adani group’s backward integration with copper manufacturing capabilities poses a particularly significant competitive threat. Despite the solid company fundamentals and positive recent results, we anticipate the stock may stagnate for the next couple of years given these competitive pressures. Consequently, we’ve partially exited this position for our PMS clients.

These examples illustrate our approach to making tactical adjustments based on emerging events and technical market movements. When we develop a long-term negative view on a particular holding, we carefully time our exits to maximize value for clients, particularly within our PMS model.

Regarding our Spark portfolio, which focuses on smaller companies with growth potential, it has experienced corrections in line with the broader small and mid-cap market segment. However, this portfolio has demonstrated impressive performance since its launch in June 2021, generating a higher compound annual growth rate (CAGR) in the advisory model. This has outperformed both the NIFTY and BSE Small Cap indices over the same period.

During this rebalancing, we made several strategic additions, including an automobile ancillary manufacturer that stands to benefit from Tesla’s anticipated entry into the Indian market and BYD’s committed $10 billion investment in a manufacturing facility in Hyderabad. These developments suggest significant future growth in the auto ancillary space. In the large-cap segment, we’ve added a leading financial services manager that has been performing exceptionally well. We conduct regular quarterly rebalancing for advisory clients, while PMS clients benefit from more frequent, event-driven transactions based on our ongoing analysis.

The Spark portfolio currently includes approximately eleven stocks with significant export exposure. As global tariff policies evolve, companies will face varying impacts. While US tariffs will affect numerous countries—particularly targeting the US, Canada, Mexico, and China—these changes may create opportunities for certain Indian companies to strengthen their market positions. However, industries must be agile in capitalizing on these opportunities. The textile industry represents one sector where India had substantial export potential but unfortunately lost market share to countries like Bangladesh. Despite high-level government commitments to grow this industry, practical implementation has lagged. Even during recent political instability in Bangladesh, Indian textile manufacturers did not fully capitalize on the opportunity to capture market share, suggesting complacency among some industry participants.

Our investment philosophy centers on identifying high-quality companies characterized by low debt levels, capable management teams, and consistent growth in both revenue and profitability. This approach allows our clients to invest with confidence, knowing their capital is deployed in financially sound businesses. While market fluctuations will inevitably occur—as demonstrated by the challenging conditions in January—our focus remains on long-term value creation rather than short-term returns. For instance, our model Jewel portfolio has appreciated approximately 6% since its last rebalancing, despite earlier market difficulties.

We don’t promise outsized returns to our clients. Instead, we emphasize that returns will naturally follow from sound investment principles and careful stock selection. Our track record over the past several years—five to six years for the Jewel portfolio and nearly four years for the Spark portfolio—demonstrates the effectiveness of this approach. We’ve become increasingly cautious over the past two years about avoiding highly valued stocks, even when they represent fundamentally strong businesses. Many attractive companies have already experienced price increases of 50-60% before we could establish positions, leaving minimal margin for safety. This caution proved beneficial during the market corrections in January and February, when many such stocks experienced significant declines.

Q&A Session

During our Q&A session, participants raised several important questions about portfolio management, international investment opportunities, and the potential impact of global manufacturers entering the Indian automotive sector. Regarding international investments, Indian investors can access global markets through international brokerage firms like Interactive Brokers under the RBI’s Liberalized Remittance Scheme, which permits investments up to $250,000 (approximately 1.25 crores) annually. Some mutual funds also offer exposure to specific international markets, and we’ve identified Alternative Investment Funds (AIFs) that provide access to global investment opportunities.

While Chinese markets appear attractively valued based on metrics like PE ratios, they face significant long-term challenges related to geopolitical tensions, particularly with the United States. The conclusion of the Ukraine conflict may redirect US strategic focus toward countering China’s growing influence, creating additional risks for investors. Simultaneously, China continues pursuing its ambition to become the world’s leading superpower, potentially setting the stage for increased global competition as described in Ray Dalio’s theories about cyclical power transitions.

US markets currently appear expensive by historical standards, with the S&P 500 experiencing a 7% correction in technology stocks year-to-date, while other sectors remain positive. Smaller deep technology companies have experienced much steeper declines of 50-70%, compared to more modest corrections of 15-20% among larger technology firms, with Tesla declining approximately 50%. A significant US recession could trigger more substantial market declines, given the Buffet indicator reading of 1.89, elevated PE ratios in the high 30s, and a price-to-book ratio approaching 5. These concerns have prompted many sophisticated US investors to reduce domestic exposure.

Regarding the impact of Tesla and BYD entering the Indian automotive market, we believe their presence will primarily affect the premium segment. Tesla will likely focus on higher-priced vehicles, capturing market share in that specific category. However, India’s rapidly growing consumer base and increasing disposable income suggest the overall market will expand substantially, creating opportunities across various price points. Domestic manufacturers like Mahindra have developed impressive electric vehicle technology, particularly in the 15-16 lakh rupee segment, while Tata Motors offers competitive models in the sub-10 lakh category, including fully electric versions of the Punch and Tiago. These lower price points represent high-volume market segments where domestic manufacturers should remain competitive.

The entry of global manufacturers could strengthen India’s overall automotive sector by increasing production volumes for both domestic sales and exports. The competition should accelerate technology advancement through knowledge transfer, similar to how Mahindra’s XUV700 model has achieved success by incorporating advanced features. While Tata Motors’ stock has declined significantly, its current valuation appears attractive. However, our investment preference favors companies with minimal debt, which has kept us cautious about Tata Motors given its substantial liabilities.

Conclusion

In conclusion, we maintain our disciplined approach to portfolio management, making strategic adjustments as market conditions evolve while adhering to our fundamental investment principles. Despite short-term volatility, India’s strong economic fundamentals and growth trajectory continue to provide attractive long-term investment opportunities for patient investors focused on quality businesses with sustainable competitive advantages.