Heady cocktail gets equities tipsy
An unsavoury combination of factors is spoiling the risk appetite of equity investors, leading to profit booking at new highs. In the last week, benchmark indices Nifty50 and S&P BSE Sensex have declined over 2% each. During the same time, the fear gauge, Nifty volatility index (VIX), has risen 11%, showing discomfort of stock market participants.
Topping the list of dampeners is the spike in global oil prices. Rising geopolitical tensions in the Middle East have pushed Brent crude to about $90 a barrel. India is a net oil importer, so higher crude prices have macro and micro repercussions. Along with elevated commodity prices like aluminium and copper, this has clouded profitability outlook of paints, tyres and specialty chemicals companies, that rely on crude-based inputs. Also, comments by US Federal Reserve chair Jerome Powell have cooled hopes of interest rate cuts in 2024. Fed is usually seen as a trendsetter for interest rate movements globally. A delay here might keep other large central banks in wait-andsures watch mode. Thus, pushing the monetary loosening cycle ahead and keeping cost of capital elevated. This could leave investors in IT stocks disappointed. Indian IT firms derive significant demand from BFSI clients in developed markets, and delay in rate cuts could mean bleaker revenue visibility.
Amid the global chaos, India is bracing for a crucial domestic event, the Lok Sabha elections. The manifesto of incumbent Bharatiya Janata Party (BJP) promises continuity and enhancement of previous policies such as ‘housing for all’ and Ayushman Bharat. This will be accompanied by new meato bolster India’s economic progress. Opinion polls indicate that the election outcome is unlikely to throw a negative surprise as anti-incumbency is not expected.
Despite the market’s optimism on the election result, excitement needs to be contained. “We would caution aga- inst using any ‘conclusions’ from previ- ous pre- and post-election market and stock price movements to draw infer- ences for pre and post-market movements over the next few months,” Kotak Institutional Equities report on 12 April, said.
On the bright side, the
India Meteorological Department has forecast aboveaverage rainfall in JuneSeptember. If this materializes, it should lift the sluggish rural demand and ease food inflation, which has been a concern lately. The waning of El Nino conditions and improved rabi sowing also bode well for agricultural production.
“On the assumption of a normal monsoon this year, we expect consumer price index inflation to moderate to around 4.8% in FY25 from estimated 5.4% in FY24,” said Rajani Sinha, chief economist at Care Ratings. With inflation moderating, the Reserve Bank of India could go for a shallow policy interest rate cut in the second half of the fiscal year, provided the Fed also starts to cut rates then, she added.
What’s more, International Monetary Fund has raised India’s growth forecast for 2024-25 to 6.8% from 6.5%. While India is expected to grow faster than peers, there are many moving parts locally and globally that can have a bearing on how growth pans out. Plus, the valuation of Indian equity market continues to be expensive. The MSCI India index trades at a one-year forward price-to-earnings multiple of nearly 21 times, a premium to Asian peers, showed Bloomberg data. However, a moderation in valuations cannot be ruled out if corporate earnings for the March quarter (Q4FY24) fail to meet expectations.
For now, unfavourable oil price movement has outweighed the positives. So, volatility could remain high with bouts of correction.