The new year has begun with a sense of unease in the markets, a stark contrast to the optimism that often accompanies fresh beginnings. Much like a hesitant foot testing icy waters, investors are approaching the next 52 weeks with caution rather than celebratory vigour. The S&P 500 is subdued, and emerging markets, including India, are struggling to find a clear direction. The shadows of 2024’s uncertainties – the ongoing Russia-Ukraine conflict, escalating Middle East tensions, and China’s economic wobbles – stubbornly persist.

New Year Jitters

For India, the picture is mixed. The economy faces a potential cyclical slowdown, the rupee is weakening, and the Reserve Bank of India (RBI) has voiced concerns about household finances. The RBI’s financial stability report has highlighted the risk of rising retail loan defaults, a consequence of last year’s surge in unsecured lending. Banks have already tightened lending standards, contributing to a slowdown in credit growth. However, consumer credit growth remains robust, continuing in double digits. This presents a paradox.

Consumption Conundrum

The latest household consumption expenditure survey offers a glimmer of hope, showing rural poverty dipping below 5 per cent for the first time and overall poverty reduction. Yet, this data seems at odds with the observed trend of premiumisation in the Indian economy. Interestingly, the top 5 per cent of households have reportedly reduced their consumption. This raises questions about the true drivers of consumption and whether the premiumisation narrative fully reflects the ground reality. Investors are keenly watching for signals of consumption revival, particularly expecting government measures in the upcoming Union Budget to stimulate spending and sustain economic growth. The government’s capital expenditure plans, with a target of ₹11 lakh crore, are also under scrutiny, as only 37 per cent has been achieved so far. A ramp-up in government spending could spur private sector investment and boost manufacturing.

NBFCs Show Promise

While the broader market grapples with uncertainty, certain sectors offer pockets of optimism. Non-banking financial companies (NBFCs) like Mahindra & Mahindra Financial Services and L&T Finance have reported positive growth in their business updates. Mahindra Finance saw a 7 per cent year-on-year increase in disbursements for Q3 FY25, with business assets climbing 18 per cent. L&T Finance reported an impressive 23 per cent jump in its retail loan book. Even Five-Star Business Finance, despite a relatively low P/E ratio of 24x, has witnessed a 26% share price bounce in the last month, indicating potential investor interest. These figures suggest resilient demand in specific segments of the financial sector.

Cautious Optimism

For equity investors, the near term is filled with anticipation as companies prepare to release their quarterly earnings reports. The bond market, however, presents a more favourable outlook, buoyed by expectations of easing interest rates, sustained domestic demand, and a benign inflation trajectory. The recent news of the RBI lifting lending restrictions on Arohan Financial Services after the microfinance lender addressed concerns about loan pricing, also signals a positive regulatory environment.

Will investors favour manufacturers or anticipate a resurgence in household spending? The answer likely lies in a blend of both. A simultaneous revival in consumption and government-led capital expenditure could indeed set the stage for another market rally. However, for now, cautious optimism seems to be the prevailing sentiment as markets navigate these early days of the new year.