Stress fracture in market’s rise, time to sling caution

Analysts are warning of growing risks to the market’s sustained momentum, and even to the possibility of consolidation at current levels.

Domestically, markets are grappling with several challenges, including a slowing economy, as indicated by the latest GDP data for the July–September (Q2) quarter of 2024-25 (FY25), sticky inflation, fluctuations in the rupee, waning consumption, and high interest rates.

India’s GDP growth for Q2FY25 fell to a seven-quarter low of 5.4 per cent year-on-year, down from 6.7 per cent in the first quarter of FY25, and lower than market expectations, with a median estimate of 6.5 per cent.

While the Sensex and Nifty indices have become more appealing, with a trailing price-to-earnings ratio of around 22x, Chokkalingam G, founder and head of research at Equinomics Research, observed that small and midcap stocks are still overvalued.

“There are risks to the Indian equity story. We are uncertain when foreign portfolio investors will turn net buyers of Indian equities.

“They may continue to sell in the short term due to a weak rupee, adverse global cues, and a stronger US economy and dollar,” he said.

Vital signs

Globally, geopolitical tensions and uncertainty surrounding US economic policies under President-elect Donald Trump present further headwinds.

Analysts believe these factors could dampen market sentiment in the short-to-medium term amid ongoing volatility.

Although India is less exposed to tariff risks compared to other open Asian economies, UBS analysts caution that the country is not immune.

They expect the incoming Trump administration to impose additional tariffs on most imports from China in stages, beginning second half of 2025.

“If the US imposes a 10 per cent import tariff on the rest of the world, the negative drag on India’s growth could persist into 2026–27.

“The rupee will not be immune to trade tension-driven dollar strength against emerging-market peers, and we expect the year-end rupee to reach 87 by 2025-26,” said Tanvee Gupta Jain, chief India economist at UBS.

Market pulse

Following the recent correction, Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, believes valuations are improving and approaching fair value.

Despite disappointing earnings in Q2FY25, he expects higher government spending and better rural income to drive a recovery in 2025.

“The risk to the market comes from the potential for tariff impositions by the Trump administration.

“In the next six months, we foresee range-bound markets.

“Investors should temper their return expectations.

“We recommend a staggered investment approach, using corrections to increase equity exposure,” Jaipuria advised.

Meanwhile, derivatives data offers an interesting narrative, with foreign institutional investors entering the December series with 67 per cent short positions in index futures.

Technical prognosis

From a technical standpoint, Santosh Meena, head of research at Swastika

nvestmart, noted that the Nifty is currently above its 20-day and 200-day moving averages but faces resistance between the 24,350 and 24,415 levels.

“A breakout above this range could push the index towards 24,625–24,770.

“On the downside, the first support lies at 23,850, with support zone between 23,650 and 23,500,” he added.