Rising inflation key risk for equities: Morgan
A likely rise in crude oil prices, an election cycle, and upward pressure on inflation owing to food price hikes, resulting in the Reserve Bank of India (RBI) hiking rates are among the top risks to Indian equities, according to a recent Morgan Stanley India Equity Strategy Almanac: The Uphill Climb.
On Monday, the wholesale price inflation (WPI) rate for June rose to a four-and-a-half year high of 5.77 per cent, rising from 4.43 per cent recorded in May 2018. The inflation rate for vegetables rose to 8.12 per cent in June, from 2.51 per cent in the previous month.
The inflation rate in the 'fuel and power' basket, too, rose to 16.18 per cent in June from 11.22 per cent in May as prices of domestic fuel increased during the month in line with rising global crude oil rates, the data showed.
Most experts say the RBI may hike rates further. Manishi Raychaudhuri, BNP Paribas' Asian Equity Strategist, for instance, expects the RBI to hike rates twice in 2018, of which one hike came through in June.
“We think the market's expectation is more benign now, but given the fact that core inflation is on a steady uptrend, consensus expectations about rates may move upwards as more data points become available,” he says.
The sharper-than-expected uptick in the WPI inflation rate in June 2018 reinforces our expectation of a likely repo rate hike at the next MPC meeting in August 2018,” said Aditi Nayar, Principal economist at ICRA.
Besides the above-mentioned risks, relatively rich mid-cap valuations, rising equity supply and the fact that the markets may already be pricing in some part of the growth recovery are the other factors that pose risks to the India equity story, says the report authored by Ridham Desai, head of India research and India equity strategist, along with Sheela Rathi.
Their base-case June 2019 target for the S&P BSE Sensex remains unchanged at 36,000 levels, while the bull-case scenario sees the 30-share index at 44,000.
“Indian stocks are jostling weak emerging markets, rising rates, higher oil prices, an election year and relatively rich mid-cap valuations. The largecap index has support from an improving growth cycle, strong macro stability and local appetite for equities,” the report says.
On the flip side, the report highlights six factors currently working in favour of Indian equities: Strong macro stability evident in a positive balance of payments (BoP) and backed by a central bank that is committed to keeping real rates positive; a bullish steepening of yield curves; a low and falling beta, which augurs well in a weak global equity market environment; India's growth, which is likely to accelerate relative to emerging markets (EM); strong domestic flows; and a weaker foreign portfolio (FPI) positioning.