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NEW DELHI : With the results season behind us, external risks will drive market fundamentals, said Pratik Gupta, chief executive and co-head, Kotak Institutional Equities. While supply-side inflation can be brought under control, demand-side inflation will be a key challenge. Risks of global recession, rising interest rates and high oil prices are major challenges and, considering the markets are still trading at high valuations, foreign funds will continue to trim their positions, he said in an interview. Edited excerpts:

What will be the impact of Q4 earnings on the markets?

At the overall index level, there hasn’t been too much impact of the March quarter results on our FY23 and FY24 NIFTY earnings estimates which are about 14% and 13% year-on-year growth, respectively. Meanwhile, on margin side, many earnings downgrades have already happened and they are already priced in, unless commodity prices go up even more, which is unlikely from here on.

What are the key factors weighing on the markets?

The big worry is the global factors that will significantly impact the markets. For the first time, global investors are hoping for a recession rather than stagflation. The stagflation environment will be more negative as you will see high inflation and very low growth.The big call right now is how quickly the US and global inflation comes under control. Also, how much of the inflation is demand-side inflation versus supply-side inflation. By the end of this year, China and other major production hubs will start normalizing and supply-side inflation should start coming under control. However, how the demand side inflation pans out with interest rate hikes and the tightening of liquidity measures needs to be watched. A further 200 basis points rate hike by the Fed and at least another 125 bps hike by RBI are being priced in, but the worry for market participants is that this may not be enough to control inflation and more rate hikes may impact growth, and hence cause a recession.

What will be the impact of oil prices on the market?

Oil price is a unique, India specific issue. Among all key emerging markets, we are quite vulnerable to oil prices and every $10 rise in crude oil price impacts our current account deficit by about 0.45% on an annualized basis. Hence, if oil averages $120 a barrel in FY23, it will be a problem. But if it averages $90 a barrel, it’s manageable for India. On a positive note, a slowdown in the US and Europe will keep oil prices under check. Even if China starts growing faster after easing of covid curbs, hopefully, oil will not go up too high. Supplies may improve through a combination of higher Saudi output, and higher shale oil production later this year and perhaps Iranian oil may also come into the market if sanctions are eased.

What’s your view on foreign institutional investors selling Indian stocks and the valuations of the markets?

From a valuation perspective, India is not very attractive for global investors. NIFTY is down 5% year-to-date, while MCSI Emerging Market index is down 14%. So, India has outperformed significantly. China is down almost 17% year to date. Our market is trading at 19 times FY23 earnings and 17 times FY24 earnings which is still not cheap.

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