Nifty headed for ruthless winter if ‘tale of 2 halves’ theory doesn't come true

While stock market returns and the country's economic growth are interlinked with each other, investors have a long history of not listening to economists. This time both are of the opinion that the second half of FY25 will be better after the first 2 quarters drove downgrades for the Indian economy as well as for India Inc.

Most analysts believe that the current slowdown in earnings, which was also reflected in Q2 GDP growth hitting a seven-quarter-low of 5.4%, is likely to be limited only to the first two quarters.

"There are a couple of things which give us confidence going into the second half of the year. Softer crude prices will help corporate margins in the second half. And as the government spends come back in the second half, we will see corporate revenues and profits reviving. So, these two factors give us more confidence moving into the second half," said Rohit Seksaria of Sundaram Mutual Fund.


As a result, while most economists downgraded India's FY25 GDP outlook, Sensex ended 445 points higher. Goldman Sachs and Emkay Global have both reduced India's FY25 GDP estimate from 6.5% to 6% while HDFC Bank and Barclays have lowered it to 6.5% from 6.8% earlier.

Morgan Stanley economists said growth is likely to have bottomed out and looks headed for rebound in H2. The trend in high frequency indicators in October and November reflects a pickup in activity momentum.

"While we had expected the slowdown in QE Sep-24, led by seasonal and transient factors, as reflected in the trends in high frequency data, the moderation was more than anticipated. In addition, the data for Oct & Nov is steady/improving, supported by the festive and wedding calendar. As such, we now expect GDP for F25 at 6.3%, vs our estimate of 6.7% earlier, with F2H25 GDP averaging 6.6%," said Morgan Stanley's Chief India economist Upasana Chachra.

Also read | Q2 GDP shocker: Will stock market dance to the tunes of macro worries?

In Q2, investment growth moderated partly due to elevated interest rates and excess rainfall in a few parts of the country, thus, impacting normal activities. While investment in roads, Railways and Defence remained resilient, commencement of projects was delayed due to excess rains. Also, funding was delayed in government projects, as the full budget was announced and approved only in the last week of July, analysts said.

Despite H1's lower-than-expected growth of 6%, Anand Rathi expects H2 to improve, with 7.7% and 8.1% growth in Q3 and Q4, respectively.

"We believe that consumption growth should be strong in H2 FY25, driven by continued strength in agriculture, which is expected to boost rural demand further. Also, the government is expected to increase spending in welfare schemes; this is likely to support demand. Meanwhile, government consumption growth stood at a four-month high. Capex is likely to be strong in H2, with only a few months left to meet the annual target. A potential rate cut is further likely to support investment and demand," Anand Rathi's Sujan Hazra said.

As far as the stock market is concerned, the bullish narrative depends only on whether the macro picture turns out to be a tale of two halves - with the second one being better than the first one. Negative surprises could lead to more downgrades and target price cuts and heavier FII outflows.

"Operating profits for key sectors such as manufacturing could normalize toward Q4 with an unfavorable base effect, while financial services could see a further slowdown amid continued tightening of lending standards," warns Madhavi Arora of Emkay Global.

While government spending has picked up the pace, data for October shows that it is more pronounced for revex, with capex continuing to lag, and now needing 60% YoY growth for the rest of FY25 to meet FY25BE, she said.

Cyclical headwinds loom in the form of pressured corporate margins amid fading input cost benefits, tighter lending standards, weaker exports, and mildly slower government net

spending growth for FY25, despite increasing populist measures across the Centre and states in H2.

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