Market Outlook: Analyst Recommends Shifting Focus to Value Stocks Amid Global Market Recovery

The global stock market is experiencing a recovery after recent turmoil caused by the carry trade. While this relief rally may continue in the short term, its strength could be tested if no significant positive triggers emerge. The carry trade issue seems resolved for now, but risks remain, particularly with the potential for the Japanese yen to strengthen due to tighter monetary policies.

Interest Rate Expectations: Will the Fed Deliver?

One of the key drivers of the current rally is the anticipation that the U.S. Federal Reserve might cut interest rates in its September meeting. The Bank of England has already reduced its rate by 25 basis points, bringing it down to 5%. However, for the stock market to maintain its momentum, substantial and timely rate cuts are necessary. Without them, the market could struggle as a slowing economy and declining corporate earnings weigh on investor sentiment.

Fiscal Policy Impact

Over the past four years, global economic growth has been supported by increased government spending, leading to large fiscal deficits. The stock market benefited from this combination of low interest rates and strong government expenditure. However, with rising inflation and interest rates, government spending is decreasing, and fiscal policies are expected to tighten. This could lead to an economic slowdown and weaker earnings growth. Given the high valuations in today’s market, a correction in prices may be due in the short to medium term.

Carry Trade Concerns

Although the market feels secure for now, assuming the carry trade issue is resolved, the differing policy views between the U.S. Federal Reserve and the Bank of Japan could lead to a narrowing of the interest rate gap. This may impact long-term carry trade positions and new foreign investments, particularly those denominated in yen. The Federal Reserve is expected to reduce its rate from 5.5% today to 3.85% by 2025, while the Bank of Japan may raise its rate from 0.25% to 0.5%.

Asian Markets

Last month, carry trade issues impacted Japan, Taiwan, South Korea, and U.S. tech companies, but India was less affected. Data suggests that India benefited from the carry trade, which gained momentum from January 2023 as the Japanese yen weakened against the U.S. dollar. Although India is somewhat vulnerable if yen-based selling resumes, the overall impact might be limited due to Japan’s relatively low asset holdings in India. While midcap stocks could be more affected, the broader influence on India’s market will come from global stock market trends and ongoing domestic investment.

Investment Strategy

Given the risk of a global economic slowdown in 2025, combined with high inflation and interest rates, it’s wise to approach the market cautiously in the short to medium term. Prioritizing value stocks over growth stocks, which have performed well in recent years, may be more prudent. Going forward, rotating investments between sectors will be essential for achieving returns. Sectors considered safe, such as FMCG, consumption, pharma, IT, and telecom, may have an edge, while manufacturing-based sectors are key to India’s long-term growth story. A stock-specific approach with careful consideration of valuations is recommended.