The Federal Reserve is expected to conclude its hiking cycle with one more hike in December, though stronger-than-expected labor market data or continued sticky inflation could lead to additional tightening. According to the latest Fed meeting minutes, 16 of 18 Committee participants see at least one additional hike this year, with most expecting the policy rate or higher to be appropriate at year-end 2027. The median longer-run dot was revised up from 3.06% to 3.25%, its highest level since 2016, indicating a higher threshold for policy restraint. Chair Warsh characterized the latest move as removing accommodation, suggesting monetary policy has not yet reached clearly restrictive territory.
According to JP Morgan's Head of Indian Equity Sanjay Mookim, energy price increases are fueling inflation globally, and India is not immune to the lag effect in the Consumer Price Index (CPI). Speaking at the JP Morgan conference, Mookim warned that higher inflation could severely dampen consumer sentiment going forward, with input cost inflation posing a direct risk to corporate margins. As companies grapple with rising costs, holding onto price increases might lead to lost margins, resulting in potential earnings misses and subsequent downgrades in the December quarter.
Mookim believes that defending margins might only be a temporary fix, advising companies to defend market share over margins instead. He noted that protecting market share should be the primary strategy for businesses in the current environment. The strategy shift comes as companies face the challenge of maintaining profitability while navigating rising input costs and competitive pressures.
India is currently witnessing a quick upcycle in exports, aided by favorable currency and tariff advantages. Mookim stated that an annual depreciation of 2-3.5% is a sustainable trend for the Rupee. The weaker currency is already benefiting the IT sector, leading to Earnings Per Share (EPS) upgrades for several IT companies, with many large-cap IT firms currently enjoying steady mid-to-high single-digit growth. However, Financials are currently exhibiting better growth metrics than IT at similar valuation multiples, with Mookim advising investors to 'Buy, be patient, and wait' for large-cap financials.
Despite two years of relatively flat returns, interest in Indian equities continues to remain robust. Mookim dismissed concerns over market expensiveness, noting that he is not worried about the valuations of large-cap companies. He clarified that India continues to trade at a premium versus Developed Markets (DMs), rather than at a discount. With growth in most Emerging Market (EM) countries continuing to remain strong, the primary question is when foreign flows will aggressively return to Indian shores, with Mookim indicating that significant flows into India will return only when the global 10-year bond yield falls from the 5% mark.
