A heady cocktail that makes equities tipsy

In the past week, benchmark indices Nifty50 and the S&P BSE Sensex have declined over 2% each. During the same time, the fear gauge, Nifty volatility index (VIX), has risen 11%, indicating discomfort among stock market participants.

 

Topping the list of dampeners is the spike in global oil prices. Rising geopolitical tensions in West Asia 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 such as aluminum and copper, this has clouded profitability outlook of paints, tyres and specialty chemicals companies, among others that rely on crude-based derivatives as inputs.

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Furthermore, recent comments by US Federal Reserve chairman Jerome Powell have poured cold water on hopes of interest rate cuts in 2024. The US Fed is usually seen as a trendsetter for interest rate movements globally. 

A delay here might also keep other large central banks on a wait-and-watch mode. Thus, pushing the monetary loosening cycle further ahead and keeping the cost of capital elevated. This could leave investors in IT stocks disappointed, in particular. 

Indian IT companies derive significant demand from BFSI clients in developed markets, and a delay in rate cuts could mean bleaker revenue visibility.

 

Amid the global chaos, India is bracing for a crucial domestic event–the 2024 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 would be accompanied by new measures to bolster India’s economic progress. So far, 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 against using any ‘conclusions’ from previous pre- and post-election market and stock price movements to draw inferences for pre and post-market movements over the next few months," Kotak Institutional Equities report dated 12 April.

On the bright side, the India Meteorological Department has forecast above-average rainfall during June-September. 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 US Fed also starts to cut rates by then, she added.

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What’s more, the International Monetary Fund has raised India's growth forecast for 2024-25 to 6.8% from 6.5% earlier. 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 the 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.