Global Equity Performance & Valuation:

 

In the last 2 months, global equity markets have rebounded  and recovered most of their losses from uncertainty surrounding Trump's tariffs. 

 

The current PE Ratio (valuation indicator) of US and European equities is trading above their long term average. US equities is now overvalued by approx 10%. 

 

Indian Large Cap is similarly overvalued by approx 10%. 

 

Emerging markets like Brazil, Korea, Philipines, Thailand etc are trading at a discount. 

 

 

 Is there a Bubble in Indian Mid and Small Caps?

 

In the last 5 years, Indian Mid and Small Caps have seen substantial gains, resulting in elevated PE ratios when compared to Large Caps.

 

However, when PE Ratio is looked together with corporate earnings growth then a different picture gets revealed. 

 

Mid and Small Caps are seeing significantly higher earnings growth when compared to Large Caps.  

 

Between FY25 and FY27, Large Caps are projected to grow earnings at 11% per annum, while Mid & Small Caps are expected to grow at 22% per annum

 

When we use PEG Ratio (PE divide by earnings growth) then Mid and Small Caps appear undervalued relative to Large Caps. 

 

 

Indian Economy and Markets - A Self-Inflicted Slowdown:

 

Indian markets have faced two consecutive quarters of economic slowdown and corporate earnings downgrades, largely due to tight  fiscal and monetary policies.

 

In 2024, the government capital expenditure (road, rail etc) slowed due to election year. Also, the RBI maintained high interest rates, further restricting growth.

 

However, 2025 has seen corrective measures, with the government taking steps in the right direction.

 

The RBI has shifted to an accommodative policy stance by cutting interest rates.

 

Additionally, the Indian government has also increased capex spending, providing a potential boost to economy. 

 

Historical data suggests Indian equity performance is highly correlated with financial conditions. The easing financial conditions could support a market uptrend in the coming months.

 

 

Easing of Global Interest Rates:

 

The past few years have been challenging for global growth due to  high energy prices, inflation, and rising interest rates.

 

To counter the slowdown, central banks are now cutting interest rates to stimulate recovery.

 

In 2025, the RBI reduced interest rates by 1%, with room for further cuts as the Real Bank Rate remains positive.

 

Lower rates will ease borrowing costs, boost spending and drive demand while also improving corporate earnings through reduced interest expenses.

 

This shift in financial conditions is expected to support global growth, strengthen market sentiment and enhance equity performance.

 

 

 Indian Govt Restarts Capex Spending:

 

Since 2014, the Indian government has meaningfully increased capital expenditure across infrastructure sectors like roads and railways, driving economic growth.

 

However, in 2024, capex spending slowed due to elections and fiscal consolidation, leading to a temporary economic slowdown.

 

In 2025, the government has course-corrected by resuming record-high capex investments.

 

This should provide a strong boost to economic activity in the coming months. 

 

 

Investor Guidance: At current levels, it is prudent to invest only that money in equity which is not required for next 5-7 years. 

 

Best Regards

 

Alpha Research

 

Disclaimer:  The perspectives provided reflect our expectations of the economy, market, and investments, which may or may not materialize. Investors are encouraged to conduct their own due diligence before investing.