Home / Markets / Stock Markets /  After a big correction in stocks, what is Ridham Desai's forecast for rest of the year?

After a big correction in stocks, what is Ridham Desai's forecast for rest of the year?

So far in September, Sensex has nosedived nearly 2,357 points and Nifty 50 plunged by around 725 points. Notably, the downside in domestic equities is still better compared to other peers in Emerging Markets.Premium
So far in September, Sensex has nosedived nearly 2,357 points and Nifty 50 plunged by around 725 points. Notably, the downside in domestic equities is still better compared to other peers in Emerging Markets.

  • Going forward, Morgan Stanley's Equity Strategist Ridham Desai expects triggers on both sides for the fourth quarter of 2022. Desai expects heightened volatility and higher correlations across stocks in the company quarter.

As of now, September month broadly witnessed more selling then compared to buying on the Indian market. Both benchmarks Sensex and Nifty 50 have dropped by more than 4% each in the current month. Going forward, Morgan Stanley's Equity Strategist Ridham Desai expects triggers on both sides for the fourth quarter of 2022. Desai expects heightened volatility and higher correlations across stocks in the company quarter. 5 factors will play a major role in the future performances in domestic equities.

In the latest report, Desai said, "We see triggers on both sides for a major move in equities up or down in 4Q2022. Indeed, the only safe forecasts for the coming quarter are heightened volatility and higher correlations across stocks within the Indian market and with other markets around the world."

Desai's note pointed focus on five factors. These are:

Geopolitics:

A supply-constrained rise in oil prices is generally bad for India's macro and markets, albeit the shift in current account funding dynamics is mitigating the impact. Other commodities such as fertilizers, seeds, and palm oil are also sources of pressure on the macro side, especially on inflation and balance of payments.

Rising US recession risks:

Historically, Indian equities have entered bear markets

when the US has slipped into recession. The US interest rate cycle and, thus, the US dollar could continue to be a source of volatility for Indian equities in the coming months due to their negative effect on earnings and BoP.

"Indian equity return correlations with the rest of the world have risen in recent weeks and could remain elevated for now," Desai's note said.

Earnings:

India Inc is set to announce third quarter results (July to September 2022) for the fiscal FY23 from the next month. Major IT companies will be the first ones to present their quarterly earnings with others following suit.

In the note, Desai said, "We have been worried about profit margins, and this remains a point of focus as we head into another earnings season. Our F2023earnings estimates are still 5% below the consensus average, even with consensus lowering earnings estimates of late. We see further risk to earnings from a slowdown in global growth in 2023. One way to offset such a risk comes from improving domestic CAPEX."

Domestic bid versus foreign selling:

According to Stanley's note, the domestic bid has been sustained beyond most market expectations. There could be an upside risk from a potential increase in the equity investing limit for retirement funds.

"We will also watch for any strengthening in FPI.FPI ownership is at multi-year lows and persistent selling since mid-2021 (except for the past few weeks) implies that as a cohort has missed out on one of the best performing large equity markets in the world," Desai said in the note.

As per StockEdge data, cumulatively FIIs offloaded equity shares to the tune of a whopping 16,742.99 crore so far in September. In August, FIIs were net buyers with an investment of 22,025.62 crore in Indian equities.

Meanwhile, as per NSDL, FPIs pulled out 3,750 crore from the equity market so far in September, compared to an inflow of a massive 51,204 crore in August. FPIs made their biggest buying in August for the current year as of now.

On the other hand, data showed that domestic investors (DII) are net buyers so far in September despite the current month's deep volatile conditions. DIIs inflow stands at 10,874.30 crore in the latest month, as of September 29. In August, DIIs were net sellers with an outflow of 7,068.63 crore.

Domestic rates:

Desai's note said, "one of the reasons behind stock volatility is rising interest rates, albeit the RBI is likely to stay behind the Fed in our base case given India's improved macro stability. The draining of foreign exchange reserves to curb currency volatility could be of greater significance if the BoP comes under more pressure."

RBI will announce September monetary policy tomorrow. RBI has already hiked the repo rate for the past three consecutive policies by 140 basis points cumulatively, and expectations of a fourth hike have been gauged. Expectations of 35 basis points to 50 basis points hike from RBI is on cards. The repo rate stands at 5.4%. While inflation has stubbornly risen to 7% currently.

On Thursday, Sensex closed at 56,409.96 down by 188.32 points or 0.33%. Nifty 50 finished at 16,818.10 below 40.50 points or 0.24% from the previous closing.

The start of September was fruitful with bulls picking up momentum as investors added beaten-down and valu stocks. Even in mid-month, Sensex crossed over the 60,000 mark and Nifty 50 reached near 18,100. However, the last two weeks of the month turned bleak as recession fears escalated in major economies like the US and Europe. Major central banks have aggressively hiked policy rates to tame inflation at the cost of economic growth.

Due to worries of a slowdown in the global economy, mayhem emerged in markets, and Sensex and Nifty 50 were both toppled along with the rupee depreciating to a fresh low of 82 against the dollar and FIIs becoming net sellers once again.

So far in September, Sensex has nosedived nearly 2,357 points and Nifty 50 plunged by around 725 points. Notably, the downside in domestic equities is still better compared to other peers in Emerging Markets. 

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