Recent high-frequency economic indicators reveal a positive trend, indicating a noticeable uptick in activity compared to the prior quarter. The rural sector is experiencing a significant rebound, largely fueled by surging sales of two-wheelers and tractors—key indicators of rural spending and agricultural confidence. Conversely, urban consumption remains relatively restrained due to limited discretionary spending.

Economic Recovery in Rural Areas

• Rural Demand Surge: The revival in rural demand is encouraging, with two-wheeler and tractor sales leading the charge. This uptick is a promising sign for rural consumption and agricultural sentiment, suggesting a healthier economic landscape in these areas.

Urban Consumption Lags Behind

• Subdued Urban Spending: Despite the positive rural indicators, urban consumption continues to struggle. This disparity highlights the uneven recovery across different sectors of the economy, with urban areas facing challenges in discretionary spending.

Manufacturing Sector Performance

On the supply side, the manufacturing landscape has shown varied results. The manufacturing Purchasing Managers’ Index (PMI) has seen improvement from the previous quarter, yet industrial production growth has shown signs of slowing down. However, construction activities are on the rise, benefiting from consistent progress in related metrics over the last five months.

Market Valuations and Investor Outlook

With the Indian economy on the mend and entering a new cycle of corporate earnings, market valuations are hovering around 20 times the projected earnings for the next year, which is below the five-year average. This situation indicates a lack of inflated valuations, potentially paving the way for growth in Indian markets, provided geopolitical tensions remain manageable.

• Investment Opportunities: The current macroeconomic environment, bolstered by capital expenditures and consumption, minimizes risks to earnings. Investors should view market fluctuations as strategic opportunities to align with long-term investment goals, favoring large-cap stocks that offer desirable valuations and a robust safety margin.

Earnings Projections and Sector Performance

Consensus estimates for FY25 and FY26 have been adjusted downward by approximately 2%, creating a low benchmark that favors a higher chance of beating expectations within the NIFTY500. Sectors like IT, FMCG, and financial services have faced challenges, yet overall profit after tax (PAT) growth has turned positive, reflecting a 4% increase. The NIFTYNEXT50 is particularly noteworthy, boasting an impressive 23% year-on-year growth for Q4 FY25.

• Guidance and Future Expectations: Recent company guidance has led to increased earnings growth expectations for FY26-27, particularly in cyclical sectors such as cement, energy, and real estate. However, large-cap IT and FMCG sectors may experience weaker earnings growth than previously anticipated.

Geopolitical Implications on Market Volatility

Given the ongoing tensions along the India-Pakistan border, it’s important to note that historical precedents, such as the Kargil conflict, suggest potential market volatility. During that period, Indian markets experienced declines of 7-9%, followed by a strong recovery of 15-18% when positive developments emerged.

Short-Term Investment Opportunities

In this context, sectors such as defense, healthcare, and financial services present promising short-term investment opportunities while maintaining strong fundamentals.

Sustained Economic Growth Ahead

The Indian economy is on a trajectory that aligns with the growth targets set by the RBI and government agencies. The services sector demonstrated robust growth in Q4 FY25, driven by significant increases in GST collections, e-way bills, toll receipts, and port cargo volumes. A combination of strong domestic demand, proactive monetary policies, and a stable external environment is conducive to ongoing investment flows.

Looking ahead, the RBI is expected to continue its course with two additional rate cuts of 50 basis points throughout 2025, barring any significant escalation in border conflicts.

Author Insight: This analysis comes from Chakri Lokapriya, Chief Investment Officer of LGT Wealth India, shedding light on the current economic climate and investment landscape.