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The recent sell-off in global equities has shaken investors out of their complacency, suggesting 2021’s stellar run may well come to an end. So far in 2022, the MSCI US and the MSCI World indices are down by about 20% and 8%, respectively. In 2021, they had rallied 37% and 20%, respectively.

The MSCI India index has performed relatively better and is down by only 1.32% in 2022. This compares with a 27% rally in 2021. Consequently, fear gauges, the CBOE volatility index (VIX) and NSE India VIX indices have risen 66% and 32%, respectively, so far in calendar year 2022 (CY22). In CY21, they fell 24.31% and 23.10% respectively.

Party poopers
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Party poopers

Against the backdrop of elevated inflation, worries remain about faster-than-anticipated interest rate hikes by the US Federal Reserve and the end of its bond repurchase programme. Nearly 44% of global fund managers surveyed this month by BofA Securities said they see hawkish central banks as the biggest tail risk to their portfolios. In the December survey, this number stood at 42%.

Out of comfort zone
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Out of comfort zone

“The sell-off that we are seeing in global equities may have started as a taper tantrum that may get followed by deeper cuts if the downside risks play out," said Deepak Jasani, head of retail research, HDFC Securities Ltd. The crucial, two-day FOMC meeting was on when this article was being written.

“Bears are winning the game of tug of war with bulls to start 2022, as uncertainty around covid, earnings, inflation and (central) bank policy fuels selling. Downward pressure on equities is not necessarily signalling the end of the current bull market, but rather the arrival of a “tantrum 2.0", said Saira Malik, chief investment officer and head of equity at Nuveen Asset Management in a weekly note on 25 January.

Equity investors are faced with other concerns, too, such as slowing global growth and uncertainty about coronavirus variants. “Even as markets have concluded that Omicron does not pose a substantial long-term threat, we still expect volatility to spike with each related headline. The fear of economic restrictions could remain an unwelcome overhang for global equity markets," Malik said.

In its latest outlook, the International Monetary Fund (IMF) has cut its forecast for global economic growth due to an anticipated slowdown in growth in China and the US. The global economy is now seen growing by 4.4% in 2022, lower than the previous forecast of 4.9%.

Also, geopolitical tensions have made a comeback with a looming conflict between Russia and Ukraine. “Markets significantly misprice the odds of an impactful war happening over Ukraine, with major volatility implied for energy, grains, fertilizer, metals, rates, and FX. This is a metacrisis that will see an acceleration towards a different globalization in which the US can still thrive, but with huge challenges for many others, including the EU," analysts at Rabobank said in a report on 25 January.

Jasani sees any escalation in the Russia-Ukraine conflict as a key risk for India, especially with regard to oil prices, which are already high. Brent crude oil prices have risen by nearly 60% in the past year to about $89 per barrel, which is detrimental for a large oil importer like India.

But that’s not all. “Corporate earnings have been mixed, with more negative surprises so far. If the Budget disappoints, we may see foreign investors reducing exposure in Indian stocks, which means longer periods of market falls and high volatility, leading to moderation in valuations of Indian equities," said Jasani.

Currently, valuations of Indian stock markets are pricey. Bloomberg data shows MSCI India trades at a one-year price-to-earnings (PE) multiple of 21, a steep premium to MSCI Asia Ex-Japan’s 12 times PE.

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