Geopolitical tension weighs on markets, earnings key

After a 3.05% run in March, the Sensex has lost 0.54% in April. It is off 1.98% seen from its recent high compared to a 1.11% drop in the MSCI Emerging Markets index


Foreign investors have already pulled out $126.35 million worth of Indian stocks after a record buying of $4.6 billion in March. Photo: Hemant Mishra/Mint
Foreign investors have already pulled out $126.35 million worth of Indian stocks after a record buying of $4.6 billion in March. Photo: Hemant Mishra/Mint

Global political tensions have dampened equity market exuberance in the past two weeks, but earnings hold the key to Indian stock performance, said brokers and analysts.

US intervention in Syria and Afghanistan, tensions in the Korean peninsula and President Donald Trump’s comments that the dollar is getting too strong have taken the sheen of the optimism seen previously. After a 3.05% run in March, the Sensex has lost 0.54% in April. It is off 1.98% seen from its recent high compared to a 1.11% drop in the MSCI Emerging Markets index and 1.51% drop for the MSCI World index.

“Global markets are at a higher risk as Trump is unable to move ahead with his reform policies and his comments on dollar is nothing but to keep its levels lower,” said Prakash Diwan, a director at Altamount Capital Management Pvt. Ltd. He added that Indian markets won’t be hurt as much unless Russia or North Korea retaliate against US action.

Globally, investors are also doubtful about Trump fulfilling his promises on tax reforms as Syria, Afghanistan etc could prove to be distractions. The risk aversion has sent investors scurrying to safe haven assets such as gold driving the precious metal to a five-month high.

Foreign investors have already pulled out $126.35 million worth of Indian stocks after a record buying of $4.6 billion in March. From the start of this month, the Chicago Board Options Exchange’s Vix volatility index, which is a gauge of fear in markets, gained 27.08% while the India Vix shed 4.25%.

Independent market analyst Ambareesh said even if FII flow reverses, domestic liquidity will continue to support the markets.

“Geopolitical tension may impact Indian market slightly as we are not globally isolated, but that will give fence-sitters an opportunity to enter into the markets,” he said.

Still, analysts such as Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt Ltd believe that earnings which may be disappointing are going to play a bigger role.

“The markets will be more focussed on FY18 management commentary than the geopolitical tension, unless it becomes a bigger crisis,” said Sharma.

That is a view that is increasingly being echoed with earnings seasons having started.

In a 10 April Note, Kotak Securities Limited had said that disappointment in earnings or on future outlook may result in corresponding specific corrections.

Analysts at brokerage firm Motilal Oswal also said that significant reforms such as demonetization and goods and services tax as well as policy changes like the ban on liquor and judicial pronouncements pertaining to BS-III to BS-IV switch over for autos have added to element of uncertainty in earnings forecast.

“The pace, frequency and magnitude of policy changes are precluding earnings predictability,” the brokerage said in an April note to clients.

More From Livemint