The Indian stock market found its mojo in April, with the Nifty 50 and Sensex jumping more than 12% from their April lows. Broader markets had an even bigger party — the Nifty smallcap 100 surged by 19.25% from its April 7 lows, while the Nifty Midcap 100 climbed 16.45%.
This bounce, fuelled by optimism over India’s economic resilience and policy support, has lifted spirits across Dalal Street. But dig a little deeper, and you will find that not everything is as rosy as the surface suggests.
According to the brokerage firm Kotak Institutional Equities, the market’s sharp rebound has a lot to do with what it calls a "degree of complacency." Essentially, investors are acting like the big issues have been solved — even though they really have not.
The fact that stock indices are now trading above what Kotak dubs "Liberation Day" levels — the point when fears around trade wars and tariffs peaked — hints at a rather relaxed attitude. But Kotak points out several unresolved challenges still lurking around: slowing global and Indian GDP growth, tariff tensions with major partners like the US, continued earnings downgrades, and richly valued stocks across the board.
Even large-cap financials, often considered the safer bets, are now approaching fair value, according to the brokerage.
One big worry hovering over the market is the slow progress on tariff agreements. The 90-day period set on April 9 to sort things out is ticking away, with only about 75 days left. Kotak is sceptical that trade deals between countries, including India and the US, can actually be hammered out within this timeframe.
As things stand, countries are mostly on an equal footing when it comes to tariffs on their exports to the US. The US has slapped a 10% reciprocal tariff across the board — with higher rates for China and some specific products, and exemptions here and there.
There is little clarity on what the final tariff structure will look like, or how non-tariff barriers — like licensing rules and quality checks — might come into play.
There is a good deal of hope floating around that India could be a relative winner in the whole tariff reshuffling game. But Kotak throws some cold water on that idea.
Even if tariffs are settled at 10% or 26% for India, the brokerage thinks non-tariff issues could turn out to be a bigger headache. Access for US firms into India’s financial services, retail, and agriculture sectors could be major sticking points. From a political perspective, it would be very tough for India to throw open its agricultural markets or allow foreign retail giants to set up shop without restrictions.
On the trade front, India’s surplus with the US might come down — but it will not be an overnight change. Committing to more imports from the US, like defence equipment and energy, seems the easiest route. But defence deals take years to negotiate, and competition for US energy exports is heating up, with Europe, Japan, South Korea, and Taiwan also lining up.
Adding to the mess, the US does not have much spare LNG export capacity left, after ramping up supplies to Europe following the Russia-Ukraine war.
If you think this rally is built on strong earnings expectations, Kotak suggests a rethink.
The brokerage reckons the Street is a bit too gung-ho when it comes to earnings projections. It flags two main issues:
First, revenues for export-heavy sectors — like automobiles, IT services, pharmaceuticals, and speciality chemicals — could come under pressure. Global GDP growth looks wobbly, and new tariffs could throw more spanners in the works.
Second, on profitability, companies might struggle to hold on to the gains from lower raw material prices. In a more competitive market, many firms could end up cutting prices to fight for market share, squeezing margins.
Take Hindustan Unilever’s recent commentary, for instance. In its fourth quarter update for FY25, HUL said gross margins would likely moderate. The company has also shifted focus from chasing profits to driving volume growth — a sign that margin pressure is starting to bite.
All things considered, while April brought back a feel-good vibe to the Indian stock market, it might be wise to keep expectations in check.
Several major uncertainties — trade issues, global slowdown fears, and earnings risks — still hang heavy in the background.
(By arrangement with livemint.com)
