Emkay sees extreme near-term volatility; says India-US trade deal key

The equity market is finally feeling the pinch, as both global funds and local investors head for the door, Emkay Global said in a report.

Analysts at Emkay Global expect volatility in the Indian stock market to persist in the near term despite recent relief measures, noting that only an India-US trade deal could offer a "lasting solution." 

 

The equity market is finally feeling the pinch, as both global funds and local investors head for the door, the brokerage said in a report. "We continue to see extreme market volatility in the short term – near-term relief from the RBI/Fed measures could be quickly overwhelmed by current account deficit pressures." 

 

The US tariffs are finally starting to compound into stress across asset classes, Emkay Global said, adding that this is weighing on the currency. "The rupee has been under continuous pressure since the initial tariff announcement in Apr-25, and this weakness is now reflecting in domestic liquidity. Such stress, aggravated by worries around fiscal deficit, has led to a prolonged bear market in bonds."

 

 

The currency has dropped in the final quarter of the calendar year despite support from the central bank, likely due to further widening of the current account deficit, the note said. Weakening exports due to front-ending earlier in the year and increasing import demand are weighing on the currency, analysts said.  Further, "elevated gold imports are accentuating the problem."

 

The stress in the financial markets is now spilling into equities as global flows are staying away due to currency fears, relative attraction in other markets and valuation concerns. Analysts noted that the domestic flows, especially on the retail front, have been affected by the domestic liquidity problem for the last couple of weeks. "The vulnerability is reinforced by the relatively high valuations for Indian equities, with the Nifty trading at 20.3 times one year forward, 4 per cent above the long-term averages."

What should investors do? 

Emkay Global expect short-term relief in the markets over the next 8-10 days. They note that the US Federal Reserve's rate cut is an incremental positive, along with the Reserve Bank of India's (RBI) liquidity measures in the last policy meeting 

 

The brokerage believes that a meaningful and lasting solution will only come through an India-US trade deal that substantially reduces tariffs on Indian exports, many of which currently face duties of around 50 per cent. Until then, Indian financial markets are likely to remain vulnerable to bouts of selling, with equities also exposed to contagion effects.

 

Over the next two to three months, Emkay Global advises increasing defensive allocations, favouring technology, pharmaceuticals and private banks due to their relatively low beta. 

 

It recommended trimming small- and mid-cap exposure given high valuations. The firm views current volatility as temporary, expecting a trade deal within three to six months. Over the long term, it remains constructive on Indian equities, with consumer discretionary as its preferred sector.