Mumbai: While a long-awaited revival in earnings growth has a real shot at materializing this year, uncertainty may still be the flavour of the season for the Indian equity market.

Though the benchmark Sensex has gained 1.2% so far this year, it is still down 5% from its peak of 36,283.25 points witnessed on 29 January. And a mix of global and domestic events playing out simultaneously could lead to increased market volatility and ambiguity.

While India is still fairly insulated to rising protectionism in the US, retaliatory moves by other countries could result into a full-blown trade war. That obviously wouldn’t bode well for the global economy and justifies the nervousness in global equity markets. Back home, revenue collection from the goods and services tax (GST) as of now has been below expectations, raising concerns on India’s fiscal deficit position. With the recently implemented e-way bill mechanism, expectations are high that tax collection would shore up.

What adds to the worry is that this being an election year, resurgence in populist measures ahead of the state elections would also weigh on fiscal deficit.

The recent surge in global crude oil prices has renewed concerns that the Indian rupee will weaken against the dollar and current account deficit (CAD) will widen further. The Indian unit hit a 13-month low of 66.06 against the greenback on Friday.

Foreign research house CLSA says the general election will be a key near-term event that needs to be closely watched. Five Indian states go for elections before January 2019, and the general elections are due by May next year. The state elections are going to be a litmus test for Prime Minister Narendra Modi, ahead of the general polls.

“The general election is by far the most important on a one-year view since the Indian story would, in Greed & Fear’s view, be badly damaged if the formidable Narendra Modi was not re-elected. Still it is too early to pontificate about next year’s poll though there will, naturally, be a lot of focus on what happens in the state election in Karnataka to be held next month," CLSA said in its note Greed and Fear dated 19 April.

Sharing a similar view, Morgan Stanley in a note dated 17 April said, “Elections present tail risks, especially if the outcome counters what is priced in. The market appears unsure of whether India will re-elect a majority government in 2019. If this uncertainty rises, we think stocks will struggle to rise in coming months."

This seems to be reflecting in the foreign investors’ investments (FIIs) in Indian equities. FIIs have pumped in a net of $1.5 billion in Indian shares year to date, but have sold a net of $600 million of the asset class so far this month.

While domestic institutional investors (DIIs) have been net buyers of Indian shares, one clear risk highlighted by CLSA is sharp slowdown in mutual fund inflow given the extent to which accumulated inflows drove the stock market last year. So far in 2018, DIIs have been net buyers to the tune of Rs. 30,405 crore and have been buyers for each month so far this year.

This means earnings downgrades may continue, even as earnings turn better, it appears they may still fall short of street expectations.

“Uncertainty is going to be the theme going ahead for the market," Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, said on phone from Singapore.

“We need to see how GST revenues pan out, we need to see how global markets behave, and how political scenario pans out with state elections and a run up to general elections next year," added Prasad.

“While Q4FY18 would see an improvement, current numbers, if met, imply 2-3% downgrade in FY18E Nifty earnings itself. Further, current FY19E Nifty EPS growth forecast is above 25%, implying high risk of earnings downgrades given that FY18E EPS growth is likely to be 7% - the seventh straight year of earnings downgrade," Edelweiss Securities Ltd said in a note on April 5.