Investor angst turns to earnings after trade clouds clear

Core Viewpoint - The Indian market is currently facing challenges, including a weakened rupee and underperformance in earnings growth, particularly in the software services sector, despite signs of potential recovery and foreign inflows [7][11][12]. Economic and Market Performance - India's economic growth has outpaced rivals, yet it experienced its worst underperformance against emerging markets in decades, with foreign investors withdrawing a record $19 billion from local stocks last year [7][12]. - Over the past 12 months, the MSCI India Index has gained 8%, while the MSCI Emerging Markets Index surged nearly 38%, indicating a significant disparity in performance [7][12]. - Earnings growth for the MSCI India Index is projected at about 8.3% over the next year, lagging behind regional peers such as China (16%), South Korea (108%), and Taiwan (30%) [11][12]. Tariff Changes and Trade Agreements - The U.S. has eliminated a punitive 25% tariff on Indian goods related to Russian oil purchases and reduced a reciprocal duty on Indian goods from 25% to 18%, providing relief to Indian exporters [8][9][12]. - The new tariff rates are expected to positively impact Indian exporters, who previously faced some of the highest tariffs in Asia [9][12]. - India has committed to purchasing $500 billion worth of American products over five years, which includes aircraft, graphics processing units, and energy, while also promising to reduce non-tariff barriers for U.S. companies [9][14]. Currency and Valuation Insights - The Indian rupee is currently viewed as undervalued, with its real effective exchange rate near a decade low, which may support macroeconomic fundamentals and earnings growth in the coming year [11][14]. - The Indian market trades at about 22 times forward earnings estimates, which is in line with its long-term average but still at a premium compared to other emerging markets [11][12]. Investor Sentiment and Future Outlook - There are signs of tentative improvement in Indian equities, with a second consecutive week of foreign inflows, a trend not seen since October [7][12]. - Some investors express bullish sentiment, suggesting that recent trade deals and the state budget could lead to a significant market rally, with a focus on quality companies positioned for future growth [12][14]. - Despite the positive sentiment from tariff reductions, analysts caution that the agreement does not fundamentally alter GDP growth or equity earnings outlooks for the next 12 months [12][14].