Investors worry carried forward to 2025

 

The year 2025 will not be a bed of roses for the Indian economy or for the capital market. We should break the chain of comparison of Indian markets with the last 4 years starting right after covid and its recovery.  We need a strong banking system and we can’t afford to have write-offs.   At the same time, the Indian capital market and the economy are entering a new phase of the ride where global uncertainties and domestic issues both are creating problems for a similar ride for the last 4 years.

Key risks to our macro-outlook are: 1) Persistent high inflation, 2) Trump’s policies and China’s growth, 3) Escalating geo-political tensions and higher commodity prices.

 Post-pandemic, Indian equities emerged as a standout performer among emerging markets, enjoying a significant valuation premium. This premium was supported by a combination of robust economic recovery, macroeconomic stability, and a stellar performance in corporate earnings. Between FY20 and FY24, the Nifty 50 index achieved a compound annual growth rate (CAGR) of approximately 20%, marking the best earnings growth phase since the 2004-2008 cycle.

India's banking sector has been grappling with the twin challenges of managing Non-Performing Assets (NPAs) and ensuring credit growth. The fiscal year 2023-24 saw leading banks writing off loans worth ₹76,599 crore, a stark reflection of ongoing systemic issues in asset quality management. While loan write-offs are an accounting adjustment rather than a direct loss, they underscore deeper structural weaknesses in India’s credit system.

The top contributors to the write-offs in FY24 include Punjab National Bank (₹18,317 crore), Union Bank of India (₹18,264 crore), and the State Bank of India (₹16,161 crore). These figures raise critical questions about the governance, accountability, and structural stability of India’s banking system.

The journey toward a resilient banking sector requires collaborative efforts from all stakeholders, including the government, regulators, financial institutions, and borrowers. The Reserve Bank of India (RBI) must continue to play an active role in ensuring robust regulatory frameworks and promoting financial literacy to prevent over-leveraging among borrowers. Simultaneously, banks must adopt modern practices and technologies to improve efficiency and resilience.

What keeps an investors awakened?

·   Growth slowdown and probable downgrades of earnings expectations, 2) Elevated equity valuations, both absolute and relative to peers, 3) Foreign investor selling amid slowing domestic investor flows  

·  India’s GDP grew 6.1% in H1 FY25 compared to 8.2% in FY24. Industrial production growth has averaged 4.3% YTD CY 2024 (vs 5.9% in CY 2023), while manufacturing and services PMI has averaged 58/60 YTD CY 2024 (vs 57/60 in CY 2023).                

 India’s current account recorded a deficit of USD 9.7 bn or 1% of GDP in Q1 FY 2025 compared to a surplus of USD 4.6bn or 0.5% of GDP in Q4 FY2024. This was driven primarily by a widening of merchandize trade deficit.                

·    1-year Overnight Indexed Swap (OIS) spread suggests market participants expects the RBI to stay on hold over the next 12 months.

·    On the market side the Nifty 12-month forward P/E at 20.2x, is below its peak of 23x, but higher than its long-term average of 18.2x.

·   Price-to-book value ratio (P/B) at 3.7x and Market cap to GDP ratio at ~144%, are above long-term averages.

·  Mid-cap equities 12-month forward P/E trades at 58% premium to large-cap equities, significantly higher than its 10-year average premium of 20%.

·   YTD 2024, foreign investors have bought about USD 1bn worth of equities compared to USD 21bn inflows in CY 2023.

Conclusion

 At the same time YTD 2024, domestic institutional investor inflows touched an all-time high of USD 59.7bn compared to USD 22.3bn inflows in CY 2023.  But the biggest question is how long this will survive and go. SIPs are being stopped when the market is falling and lump sums are getting dried slowly. India’s banking sector is at a critical juncture. The staggering loan write-offs in FY24, while a necessary measure for balance sheet hygiene, highlight the urgent need for systemic reforms. Strengthening governance, leveraging technology, and fostering accountability will pave the way for sustainable growth and stability in the sector. The time to act is now, and the path forward demands collective responsibility and unwavering commitment. At this point, we cannot take more write-offs -off but it seems any slowdown and the above threats might create some issues for the RBI, particularly for the unsecured loans and MSMEs. We all know when things get tough those who are on the lower end of the curve only when the big cats get into trouble.

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How was 2024 NFO market and what lies ahead for 2025?

 

The NFO trends of 2024 highlight a significant inclination towards sector-specific funds, passive investments, and hybrid strategies. These trends align with broader market themes of investor caution amid global uncertainty, coupled with optimism for India’s growth sectors.  The mutual fund industry introduced 200+ schemes in 2024, raising substantial capital.  With ₹110,897 crore raised across multiple categories, the NFO activity provides key insights into investor behaviour and fund house strategies. This essay delves into the NFO trends, category-wise performance, and future opportunities in the mutual fund industry. The data analysis throws light that the  fund houses have been strategically introducing schemes to cater to evolving investor preferences, market conditions, and regulatory landscapes.

Key Highlights of the NFO Market in 2024

1. Dominance of Sectoral and Thematic Funds
• Schemes: 40
• Amount Collected: ₹67,772 crore
2. Rise of Index Funds
• Schemes: 76 (Highest number of schemes launched)
• Amount Collected: ₹11,896 crore
  
  
3. Interest in Multi-Asset Allocation Funds
• Schemes: 8
• Amount Collected: ₹7,435 crore
4. Significance of Multi-Cap Funds
• Schemes: 5
• Amount Collected: ₹6,326 crore
5. Steady Inflows into Dynamic Asset Allocation/ Balanced Advantage Funds
• Schemes: 3
• Amount Collected: ₹1,598 crore

 II. Emerging Trends and Insights

1. ETFs Gaining Traction
• Other ETFs collected ₹1,438 crore across 41 schemes.
• Gold ETFs, while limited to 3 schemes, attracted ₹70 crore.
• Analysis:
  
  
2. Moderate Interest in Small and Focused Funds
• Small Cap Funds: ₹703 crore from 2 schemes.
• Focused Funds: ₹110 crore from 1 scheme.

Debt & Others 

1. Limited Launch of Duration Funds
• Long Duration Funds: ₹109 crore from 2 schemes.
• Medium to Long Duration Funds: ₹72 crore from 1 scheme.
2. Retirement and Dividend Yield Funds
• Retirement Funds: ₹307 crore from 2 schemes.
• Dividend Yield Funds: ₹1,006 crore from 1 scheme.

From the investor's angle, we find a significant preference and shift towards  Passive Investing. The strong performance of index funds and ETFs highlights a growing trend towards passive strategies, driven by cost efficiency, ease of access, and increasing availability of such products in the market. On the other hand  Sectoral Focus we find that Defence, Manufacturing had significant demand. The prominence of sectoral and thematic funds shows that investors are looking for concentrated exposure to growth sectors, likely driven by policy tailwinds and macroeconomic shifts.

Conclusion

Fund managers and investors should align their strategies with these emerging preferences for optimal outcomes. Index funds' growth indicates a shift towards passive investing due to lower costs and increased investor awareness. The trend aligns with global practices where passive funds have outpaced active funds in popularity.

Investors might be leveraging index funds to gain diversified exposure to benchmark indices, reducing individual stock-picking risks. The ETF segment continues to grow as investors look for cost-efficient, transparent, and liquid investment avenues. Gold ETFs’ modest inflows reflect cautious optimism toward gold as a hedge against inflation. The market and investor preferences and choices are creating opportunities for NFO innovations.

The AMC industry will evolve more with the new Rs 10 lakh product which will throw light for more innovation. If sensex will be 2lakhs by 20230 then the product basket for investments has to be innovative and new theme-based products will find huge growth in the coming days. We will find more hunger for innovative products and innovative combinations of themes. But we need to avoid over lapping in allocation and do more research in small caps to find out future Midcaps and large caps where the growth will match with 7 trillion Indian GDP 

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Will SIP stoppage record of 2024 will break in 2025 ?

We Indians by birth have the gift of doing bargains but when it comes to investments we lose the grip. We sell at low and buy at high despite of 100 hours of training on the same.  The SIP (Systematic Investment Plan) stoppage ratio in November 2024 reached 79.12%, representing a significant trend reversal in the mutual fund industry. The increase in SIP discontinuations to 39.14 lakh from 38.8 lakh in the previous month highlights rising investor caution amidst market volatility and external economic pressures.  

Stoppage Ratio jumped to the third-highest level in history, with 39.14 lakh SIPs discontinued. The irony of the 2024 is that during Feb 2024 the decline in new registrations,  saw a 10.3% decrease in SIP discontinuations, with 21.33 million accounts discontinued compared to 23.80 million in January.  As a result, the ratio of SIPs stopped as a percentage of fresh SIPs registered (SIP stoppage or closure ratio) came in at 42.83%  in February -- the slowest pace of rise since December 2021, from 46% in January.

The irony is that in 2024 same year we found that in November 2024, the SIP stoppage ratio climbed to 79.12%, marking the third-highest level historically. In May 2024, the ratio peaked at 88.38%, indicating a steep drop in investor confidence earlier in the year.  

The general election results and their impact created an opportunity but the data reveals we missed the opportunity deliberately. Now when we get back to May 2020 which was during the COVID-19 pandemic-induced market crash, the ratio was 80.69%, reflecting financial distress and market uncertainty. The current stoppage ratio (79.12%) is comparable to May 2020 (80.69%), a time marked by pandemic-related economic disruptions. Unlike 2020, where financial distress was the primary driver, 2024 discontinuations seem influenced more by market sentiment and reallocation preferences.

What makes the sip to be discontinued?

Most SIPs are non-goal-linked and NFO-driven sales. Hence most of the SIPs can be called non-goal SIPs. Further, SIPs also get stopped due to an evident trend of investor nervousness, with many exiting SIPs during market corrections or when they perceive high valuations. The data from November 2024 shows a consistent increase in stoppage ratios over four consecutive months, with a notable decrease in new SIP registrations. It has been found that a significant number of SIPs do not last long, with 40% being discontinued within a year and 70% within three years. This points to a lack of patience among investors, potentially missing out on long-term gains.

Further market volatility, geopolitical tensions, and reactions to regulatory changes have been cited as reasons for the high discontinuation rates. For example, the Lok Sabha Elections in May and the US elections in November influenced investor behaviour, leading to increased SIP stoppages.

Apart from Stoppages 49 lakh new SIP accounts were registered in November, a sharp drop from 63.7 lakh in October.

Conclusion

The high stoppage ratio is a setback for the industry, which relies heavily on retail participation for stable inflows. Fund houses may face liquidity challenges and pressure to adjust portfolios in response to redemption demands. The surge in the SIP stoppage ratio to 79.12% in November 2024 underscores significant investor caution amid challenging market conditions. While the industry faces short-term headwinds, this presents an opportunity to educate and engage retail investors on the benefits of staying invested. Fund houses and regulators must proactively address concerns and innovate to rebuild confidence, ensuring the sustained growth of the mutual fund ecosystem. In the coming 2025 we will get many opportunities in the market to create wealth but the biggest question is that retail investors will trust to buy when the knife is falling. The biggest challenge will be now that will 2025 beat the stoppage number of 2024. Another irony is that we don't get the data of Direct Plans SIP stoppage. Since that is a grey area where stoppage often happens due to a lack of advisory. We Indians have a habit of DIY in every subject before we face a huge loss.

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Which Asset Class performed During Trump 1st term & what is expected?

 

Every new year starts with a debate about which asset class to focus on the angel for the client’s allocation of funds. Every year different asset classes perform and wealth is created through the same. One needs to know which asset class has performed at various times and what one should look ahead.

Don’t underestimate the knowledge level of the client. They are more informed and their gut feeling and analysis are stronger since it is their hard-earned money. At the same time, financial planners and MFDs also have to plan a decide what will be the course of action for 2025 based on the historical analysis of different asset classes covering different time series and market cycles. 

  As we enter into 2025 we have domestic issues like low government spending, stretched valuations, falling revenues and rising costs. At the same we have threats of exports getting hit by tariffs which will further impact profitability and revenues hence asset class behaviors will change compared to what we have witnessed in last 4 years.  This analysis is a guide map for deciding your asset allocation plan for your wealth creation and wealth preservation.

  The Era of Trump- The Tariff Phase  

 2017:

• Best-performing allocation:
  Equity: 70%, Debt: 20%, Gold: 10%
  A high allocation to equity performed the best, reflecting strong equity market growth during this year. Bullish market conditions favored riskier assets.

• Worst-performing allocation:
  Equity: 20%, Debt: 60%, Gold: 20%
  Again, high debt allocation underperformed, as equity markets dominated returns this year.

 2018:

• Best-performing allocation:
  Equity: 34%, Debt: 33%, Gold: 33%
  Similar to 2016, a balanced allocation outperformed. Increased market volatility likely made diversification more effective.

• Worst-performing allocation:
  Equity: 70%, Debt: 20%, Gold: 10%
  A high equity allocation underperformed due to possible corrections or heightened market risks in the equity segment.

 2019:

• Best-performing allocation:
  Equity: 70%, Debt: 20%, Gold: 10%
  Equity dominance returned, with a high allocation to equity providing the best returns. This indicates strong equity market recovery or growth.

Worst-performing allocation:
Equity: 20%, Debt: 60%, Gold: 20%
High debt allocation was again the lowest-performing, reflecting the continuing underperformance of fixed-income instruments relative to equity.

Trends Across 2017–2021

 1. Equity Performance:

• Equity-heavy portfolios (70% allocation) performed exceptionally well in bull markets (2017, 2019, 2021).
• However, during periods of volatility (2018, 2020), high equity exposure underperformed, reflecting its sensitivity to market corrections.

 

2. Diversification Benefits:

• Balanced allocations (34% Equity, 33% Debt, 33% Gold) outperformed during volatile years (2018, 2020), underscoring the value of diversification in mitigating risks.

 3. Role of Gold:

• Gold proved to be an essential hedge during uncertain periods like 2018 and 2020, offering stability when equity markets faltered.
• In bullish equity years (2017, 2019, 2021), gold had limited value, as investors preferred riskier assets.

 

4. Debt Underperformance:

• High debt allocations (60%) consistently ranked at the bottom, as fixed-income instruments offered lower returns in a low-interest-rate environment.

 

 Key Insights:

1. Market Dynamics:
• Equity allocations performed well during years of bullish equity markets (2017, 2019).
• Balanced allocations excelled during volatile or uncertain years (2016, 2018).
2. Diversification:
   A balanced mix of equity, debt, and gold was consistently among the top-performing allocations during years of uncertainty, highlighting the importance of diversification.
3. Debt Underperformance:
   High debt allocation consistently underperformed, suggesting that it may act as a drag on portfolio returns during periods of equity growth.
4. Gold's Role:
   Gold contributed positively during periods of market uncertainty (2016, 2018) but was less impactful during strong equity years (2017, 2019).

Comparison of Returns by Asset Class

Year	Equity (Nifty 500 TRI)	Debt (Crisil Bond Index)	Gold (Gold ETF)
2014	Strong	Stable	Weak
2015	Weak	Stable	Stable
2016	Moderate	Moderate	Strong
2017	Strong	Moderate	Weak
2018	Weak	Stable	Moderate
2019	Strong	Moderate	Strong
2020	Moderate	Strong	Strong
2021	Strong	Weak	Weak
2022	Moderate	Weak	Moderate
2023	Moderate	Moderate	Moderate

If we look into the broader range of performance of different asset class find:

Equity (Nifty 500 Total Return Index)

Performance Highlights:

1. 2014–2017:

   • Equities performed exceptionally well, driven by post-2013 reforms, accommodative monetary policy, and global liquidity.
   • 2017 saw one of the strongest rallies due to synchronized global growth and strong domestic earnings momentum.

2. 2018:

   • A challenging year due to global trade tensions, rising crude oil prices, and tightening liquidity.
   • Equity returns were modest to negative, reflecting heightened volatility.

3. 2019–2021:

   • A strong rebound in 2019 due to central bank easing and corporate earnings recovery.
   • 2020 saw a sharp correction during the COVID-19 crash but a remarkable recovery fueled by fiscal stimulus and liquidity.
   • 2021 was a stellar year, driven by post-pandemic recovery, pent-up demand, and liquidity injections.

4. 2022:

   • Volatility returned due to geopolitical tensions (e.g., Russia-Ukraine), high inflation, and rate hikes.
   • Returns were positive but lower than previous years.

5. 2023:

   • Moderately positive as markets adjusted to tightening liquidity, but equities remained a strong performer overall.

Average Annualized Returns (Last 10 Years):

• Approximately 10-12% CAGR, with significant upside in strong years (2017, 2021) and downside in volatile years (2018, 2020).

Conclusion:

• Diversification: Investors should consider diversifying across these asset classes to balance risk and return.
• Risk Appetite: Risk-tolerant investors might lean towards equity for higher potential returns, while risk-averse individuals could focus on debt and gold.
• Market Timing: Gold and equity perform well in specific conditions (e.g., during crises or bullish phases), so understanding economic trends can enhance investment decisions.

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SEBI's New product Restrictions and Opportunities & Why

 

The Securities and Exchange Board of India (SEBI) has recently taken a significant step in the evolution of India's financial markets by introducing a new asset class known as the "Specialized Investment Fund" (SIF). This development, aimed at bridging the gap between traditional mutual funds and more exclusive Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs), has the potential to reshape investment strategies for a demographic of investors looking for higher risk and potentially higher reward opportunities within a regulated framework.  

One of the key ideas might have been to promote passive investments more since if India needs a higher allocation in the MSCI index India needs more allocation towards passive funds hence this is one of the asset classes which will help to do the same. Further, many unrecognised PMS modes have been developed under the RIA model where equity portfolios of Rs 5lakhs, Rs 10lakhs and so-called small cases have been sold as hot dogs in the last 4 years. Further keeping the expense ratio the same as Mutual Funds reduces the fear of pricing of the products being termed as expensive and the minimum ticket size of Rs 10 lakhs differentiates between the class of the investors who can do investments.  We might see a more active combination of investment options as the product maturity increases and preference grows up.

 Minimum Investment: The minimum ticket size for investing in this new asset class is set at ₹10 lakh. This threshold aims to attract investors with a higher risk appetite who have investible funds between ₹10 lakh and ₹50 lakh but are not looking to invest in Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs) which require much higher investments.

• Structure: The SIF can be structured as open-ended, closed-ended, or interval schemes, providing flexibility in terms of when investors can enter or exit their investments.
• Investment Strategies: This asset class allows for more aggressive investment strategies compared to traditional mutual funds. It includes opportunities for long-short equity funds and inverse Exchange-Traded Funds (ETFs), aiming to provide investors with the ability to hedge against market downturns or speculate on market declines.
• Regulatory Oversight: While offering flexibility, it remains under SEBI's regulatory oversight to ensure investor protection and transparency. The new asset class has specific rules regarding investments, like a higher single company exposure limit of 15% and up to 20% in single-issuer debt with board approval.
• Objective: One of the primary objectives of introducing this asset class is to curb the proliferation of unregistered and unauthorized investment schemes that often promise unrealistic returns. It aims to provide a regulated platform for riskier investments that were previously sought through unregulated avenues.
• Eligibility for AMCs: Only mutual funds with substantial assets under management (AUM) or those managed by experienced fund managers can offer these products, ensuring professional management and oversight.
• Taxation and Fees: There's an expectation that this new asset class might follow a similar taxation model to mutual funds, but the exact details were still under discussion as per the last updates.

Launching Investment Strategies

1. Procedure Compliance:
• Investment strategies must follow the same process as mutual fund schemes under Regulation 28.
2. Types of Strategies:
• Open-ended, Close-ended, or Interval strategies, with clearly disclosed subscription and redemption frequency.
3. Fees and Expenses:
• Must comply with Regulation 52 of mutual fund regulations.

 

Investment Restrictions

1. Debt Instruments:
• Single Issuer Limit:
• Not more than 20% of NAV in debt instruments (money market or non-money market) issued by a single issuer with an investment-grade rating.
• Can increase to 25% with prior approval from the Board of Trustees and the AMC Board.
• Exceptions:
• Government securities, treasury bills, and triparty repo.
2. Company Ownership:
• Specialized Investment Funds under all strategies cannot own more than 15% of a company’s paid-up capital with voting rights.
• If mutual funds already hold 10%, Specialized Investment Funds may acquire an additional 5% maximum.
3. Equity Instruments:
• No strategy can invest more than 10% of NAV in the equity shares or equity-related instruments of a single company.
4. REITs and InvITs (Real Estate and Infrastructure Investment Trusts):
• Total Investment: Not more than 20% of NAV.
• Per Issuer Limit: Not more than 10% of NAV.
• Total Ownership Across Strategies: Not more than 20% of units issued by a single issuer.
• Exceptions: Index funds and sector/industry-specific schemes.

 This initiative by SEBI is seen as a move to offer investors, particularly high-net-worth individuals (HNIs), regulated products that have higher risk-taking capabilities, filling the gap between mutual funds and PMS.  SEBI's introduction of the Specialized Investment Fund marks a pivotal moment in India's journey towards a more sophisticated financial landscape. It acknowledges the growing demand for diverse investment avenues and recognizes the need for regulation to accompany financial innovation. As this new asset class takes root, it will be crucial to monitor its impact on the market, ensure robust investor protection, and adopt regulatory measures to keep pace with the evolving financial environment. This move not only broadens the investment horizon for Indian investors but also signals SEBI's commitment to fostering a dynamic, secure, and inclusive financial market.

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22 Central Banks this week will decide for 2025

 

The conclusion of 2024 marks a pivotal juncture for the global economy. A year that saw inflation finally subsiding in most advanced economies is ending with a wave of central bank decisions that signal cautious optimism tempered by persistent uncertainties. From the Federal Reserve in the United States to smaller emerging market economies, monetary authorities are balancing fostering growth and managing inflationary pressures. This essay explores the major economic developments and central bank actions as the world prepares for 2025.

 The global economic landscape is closing out 2024 with a series of critical central bank decisions and economic developments that signal cautious optimism amid lingering uncertainties. Around 22 central banks will be deciding on their interest rate outlook for this week setting the stage for 2025.  We will witness extensive currency volatility starting 2025.

Monetary Policy Overview

1. Federal Reserve (US):

·        A quarter-point rate cut is expected this week, reflecting cooling inflation trends.

·        Future rate decisions might be tempered by potential inflationary pressures from the incoming Trump administration's tariff policies.

2. Bank of England (UK):

·        Likely to hold rates steady, balancing growth concerns and persistent inflation.

·        Monitoring the global trade environment and domestic price pressures.

3. Bank of Japan (Japan):

·        Following its exit from negative rates, the BoJ is likely to maintain its current stance until 2025. They might go for rate hikes in 2025.

4. Other Advanced Economies:

·        In Europe, the Bank of Sweden might enact further rate cuts, while Hungary and the Czech Republic are expected to hold rates steady.

·        Similarly, Indonesia and the Philippines are both poised to reduce borrowing costs by 25 basis points.     

·        The Bank of Russia may deliver a significant 200 basis point hike, pushing rates to a record 23%, in response to high inflation.

5. Emerging Markets in Asia:

·        Central banks in Pakistan, Indonesia, and the Philippines are poised for rate cuts to support growth.

·        Thailand’s central bank is expected to keep rates steady at 2.25%.

6. Israel:

Inflation is rising modestly amidst economic strain from the Gaza conflict, keeping rate hikes off the table until mid-2025.

7. Canada:

In Canada, Finance Minister Chrystia Freeland is set to release a long-delayed budget update amid speculation that she has breached her promise to keep the deficit under C$40.1 billion. Meanwhile, Purchasing Managers' Index (PMI) data from Australia, India, and Japan will offer valuable insights into business sentiment and regional growth trends.

Beyond monetary policy, fiscal measures and economic data releases are shaping the narrative as 2024 ends. In Canada, Finance Minister Chrystia Freeland is set to release a long-delayed budget update amid speculation that she has breached her promise to keep the deficit under C$40.1 billion. Meanwhile, Purchasing Managers' Index (PMI) data from Australia, India, and Japan will offer valuable insights into business sentiment and regional growth trends.

In Europe, survey indicators will shed light on the impact of political turmoil in France and Germany on business confidence. Further south, Israel’s inflation rate is expected to rise modestly, reflecting the economic strain of the ongoing Gaza conflict and increased government spending.

Conclusion:

While inflation is cooling in many parts of the world, risks remain. The prospect of new tariffs from the Trump administration in the U.S. could reignite price pressures globally, complicating monetary policy decisions. In Russia, persistently high inflation underscores the difficulty of maintaining economic stability amid geopolitical and domestic challenges. China’s ability to sustain recovery through targeted stimulus will also be crucial for global economic momentum. As 2024 draws to a close, the global economic landscape is marked by transition.

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Should you believe the S&P 500 Targets for 2025?

Do you expect a correction in U.S. markets or do we expect a strong rally? We all have witnessed in the past that the yearly outlook of most of the Global banks, Broking houses and analysts fails to give a correct projection and in most cases, it is just the opposite of what they predict.  Should you be allocating more to U.S. funds and ETFs or should you look to other countries for investments?  It is not about Trump and his economic policies but only about the analysis of 2024 and the base it had created for U.S. economic prosperity and stock market valuation.

The U.S. economy faces significant income inequality. S&P 500 alone is not able to project to correct guidance for the outlook. The technology sector, especially the "Magnificent Seven" stocks (Apple, Amazon, Alphabet, Microsoft, Meta, Tesla, and Nvidia), has been a focal point. Despite concerns over valuations, these stocks are expected to continue performing well, albeit possibly not as dramatically as in 2023. However, the energy sector is also noted for having the highest percentage of analyst "buy" ratings, suggesting potential for outperformance.

The U.S. markets show signs of exuberance, with stock prices at all-time highs and valuation metrics reaching unsustainable levels. Despite multiple rate hikes earlier, the markets seem to have priced in interest rate cuts for the coming year, fuelling further optimism. The U.S. is facing challenges with a national debt of $36 trillion and a GDP deficit nearing 7%.

Many stocks, particularly the "Magnificent Seven," are trading at elevated levels, raising questions about their long-term sustainability. Stock markets worldwide are hitting record highs, suggesting potential overheating that could result in a sharp correction. In the U.S., inflation has risen in recent months, causing alarm. Both consumer and wholesale prices, which had shown steady improvement last spring, have recently picked up, delivering an unwelcome surprise.

 Trump Economics and Cost of Living

Studies from Trump's first term show that tariffs imposed on goods like steel, aluminium, and numerous products from China led to increased costs for U.S. importers, which were often passed on to consumers. For example, research indicated that these tariffs increased prices for consumers by between $500 to $1,700 per household annually, depending on the scope of the study and what factors were considered.

We all are aggressively waiting for U.S rate cuts to happen but do we measure how much the benefit would be for those rates cuts? Studies from Trump's first term show that tariffs imposed on goods like steel, aluminium, and numerous products from China led to increased costs for U.S. importers, which were often passed on to consumers. For example, research indicated that these tariffs increased prices for consumers by between $500 to $1,700 per household annually, depending on the scope of the study and what factors were considered

Proposed Tariff hikes Impact

Trump has proposed a 10% to 20% tariff on all U.S. imports, alongside significantly higher tariffs on goods from China (60% to 100%) and Mexico and Canada (25%). If implemented, these tariffs are estimated to raise consumer prices further.

• An average household could see an annual cost increase of around $1,500 due to a 10% tariff on all imports, with middle-income families potentially facing a $1,700 increase.
• A 25% tariff on Mexican and Canadian car parts could add about $2,100 to the cost of each U.S.-assembled vehicle, while cars produced in Mexico or Canada might cost up to $10,000 more. Tariffs could cause a typical family's annual grocery budget to increase by almost $200 in 2025, representing over a 3% rise in costs.

The expectation of a 10% increase in earnings for S&P 500 companies in 2024, following a 3% rise in 2023, has fuelled buyback activities. Companies with excess cash from these earnings are more inclined to repurchase shares, especially when they believe their stock is undervalued. As the stock market is currently overvalued the same is not expected to happen in 2025. This buyback will come in place only when the market will fall down. 

The job market shows signs of deterioration, with the hiring rate falling to 3.3%, the lowest since the 2020 pandemic. This rate is now below both the pre-pandemic average and levels seen during the 2001 recession. Despite this, U.S. labour productivity since the 2008-09 financial crisis has grown by 30%, significantly outpacing the Eurozone and the UK, which has implications for global economic hierarchies.

The housing market has seen substantial price increases, with the average home price in the U.S. up over 50% in the last five years, more than double the increase in wages. This has led to the least affordable housing market in history, highlighting a significant gap between housing costs and income levels.

S&P 500 valuations and Trumps impact Outlook

The forward price-to-earnings (P/E) ratio for the S&P 500 has risen to around 20, suggesting that stocks are currently overvalued relative to historical norms. This high valuation, coupled with optimistic earnings estimates, indicates the potential for market corrections if these expectations aren't met.  The P/E ratio on the S&P 500 has moved up to 26, with a multiple expansion of 17% in 2024, which is significantly above the average since 1989.

Buyback Saviour for S&P 500

The S&P 500 rally could sustain based on the buy back of shares. U.S. companies are on track to buy back a record amount in 2024. Projections suggest that buybacks could reach or exceed $1.1 trillion, showing a substantial increase from previous years, with some estimates even pointing towards a figure close to $1.2 trillion by the end of the year.

• Q1 2024: Buyback volume for U.S. companies totaled $238.6 billion, marking a 4.1% increase from the same quarter a year earlier. This quarter saw a recovery in buyback activity after a period of stagnation, with companies like Apple, Alphabet, Meta Platforms, NVIDIA, and Wells Fargo leading the charge.
• Q2 2024: Buybacks jumped by 35% compared to the first quarter, reaching $236 billion, which was near the all-time record. This surge was largely driven by the top 20 companies in the S&P 500, which accounted for 52% of all repurchases, surpassing long-term averages in terms of concentration.

 Conclusions:

Trump's economic policies will bring up inflation for the U.S. and that can't be ignored.  The stability of the job market at the cost of higher inflation is a tricky path and most difficult to travel.  The benefits of Tariff hikes and job creation will be nullified by the high cost of living.

Overall, while the U.S. economy shows robust growth in productivity and certain sectors, it faces challenges in labour market dynamics, housing affordability, and fiscal sustainability. The balance of these factors will continue to shape the economic landscape in the coming years. Don’t think it is only Trump who will keep the Tariff hikes. There's a risk of retaliatory tariffs from affected countries, which could affect U.S. exports, leading to job losses in export-dependent industries and further economic strain.  Keeping an allocation in the U.S. is important since its deglobalization hiccups are an opportunity for creating long-term wealth for investors' portfolios. At the same time, profit booking cannot be ignored and rebalancing should be continued.

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