The stock market in India is currently facing a cyclical slowdown, with concerns that global factors, particularly President Trump’s economic policies, could exacerbate this trend, causing a more severe downturn. Saurabh Mukherjea, the founder of Marcellus Investment Managers, recently expressed his apprehensions about the market’s trajectory in a podcast with Raj Shamani.
Mukherjea highlighted that India had enjoyed three prosperous years post-COVID, with FY22, FY23, and FY24 standing out as particularly robust periods. However, he noted that it is uncommon for the market to sustain such rapid growth over four consecutive years. Typically, by the fourth year, there is a cyclical slowdown due to limitations in key supply-side factors like labor markets, capital markets, and land markets. This inherent weakness has started to manifest, signaling a potential downturn.
The liquidity crunch in banks has been a critical issue, impacting loan growth significantly. Mukherjea pointed out that the current scenario reflects a supply-side weakness where deposit growth is sluggish, leading to a reduction in loan growth. As individuals withdraw their savings to invest in the stock market, liquidity within the banking system diminishes, creating a precarious imbalance.
Historically, India has witnessed two types of slowdowns – benign and painful. The benign slowdown, as observed in 2016, entails a temporary pause in growth before a swift recovery. On the other hand, the painful slowdown, reminiscent of the 2012-13 period, involves more prolonged and challenging market conditions. Mukherjea emphasized the impact of a strong dollar on the Indian economy, explaining how the Reserve Bank of India might be forced to tighten liquidity to stabilize the rupee, exacerbating the slowdown.
Of particular concern is the role of Donald Trump’s economic policies in potentially intensifying the market downturn. Mukherjea expressed worry that Trump’s actions to strengthen the dollar through measures like imposing tariffs on other countries could increase the severity of the slowdown in India. The implications of these policies could lead to a more painful correction akin to the challenging period of 2012-13.
The recent performance of the BSE Sensex, which has declined by 13% since October 2024, along with substantial drops in mid- and small-cap indices, has raised alarms among market experts. Jimeet Modi, the Founder & Director of Samco AMC, cautioned that unwinding the five-year bull market might take longer than anticipated due to lingering excesses in certain segments. While some analysts believe that the market is approaching a bottom, the overall sentiment remains cautious.
Despite the prevailing concerns, Mukherjea remains cautiously optimistic, hoping that the slowdown will resemble the more manageable 2016 experience, characterized by a temporary deceleration followed by a swift recovery. However, he emphasized the need to monitor Trump’s policy decisions closely, as any escalation in tariffs or dollar strengthening could pose significant challenges to the market outlook.
In conclusion, while the future trajectory of India’s stock market remains uncertain, it is essential for investors to approach the situation with careful deliberation. The insights shared by experts like Saurabh Mukherjea and Jimeet Modi serve as valuable guidance in navigating the current economic landscape. As developments unfold, seeking advice from qualified financial advisors is crucial in making informed investment decisions in these volatile times.
