Multiple Challenges Weigh on Indian Equities Amid Global Uncertainty

Multiple Challenges Weigh on Indian Equities Amid Global Uncertainty Image/Mint

VoM News Desk | September 25, 2023 | 11:39 PM IST | Breaking News | Follow on Google News

Multiple Challenges Weigh on Indian Equities Amid Global Uncertainty

Mumbai: Indian equities are facing a confluence of unfavorable factors that are impacting investor sentiment and could deter risk appetite. Several factors contribute to this uncertainty, including rising US bond yields and a strengthening US dollar index, making equities less attractive amid concerns about a global recession. The US 10-year bond yield reached 4.5% on Monday for the first time since October 2007.

The recent monetary policy decision by the US Federal Reserve has reinforced the narrative of higher interest rates for an extended period. Additionally, the Fed’s dot plot indicates that the expected rate cuts in 2024 will be less than initially anticipated. Emerging market equities, including India’s, are considered more vulnerable to higher interest rates, leading foreign investors to seek refuge in safer assets such as the US dollar.

Despite outperforming Asian peers in 2023, Indian equities face unique challenges. The rising crude oil price has significant repercussions for India, a net oil importer, including upward pressure on the current account deficit (CAD) and inflation. Higher interest rates in the US may present headwinds for the IT sector, while elevated global oil prices could reverse the recovery in profitability seen over H2FY23-Q1FY24. Weaker-than-expected tax collections and CAD may limit the government’s flexibility to support the economy.

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Foreign fund flows into the Indian equity market have turned negative in September after six consecutive months of inflows. While domestic institutional inflows provide some support, the benchmark Nifty 50 index has retreated from its peak of 20,000 points, closing at 19,674.55 points on Monday.

Persistent high oil prices are concerning for companies that use crude or its derivatives as inputs. Companies may face profitability pressure unless they pass on the added costs to consumers.

Downside risks include persistent inflation, a potential downgrade of FY24 Nifty earnings per share estimates, a weak monsoon season impacting inflation, falling reservoir levels affecting Rabi crop sowing and food inflation, and the impact on the Reserve Bank of India’s monetary policy decisions.

The ongoing India-Canada feud poses another risk, potentially dampening sentiment for long-term foreign flows.

India’s valuation is also causing discomfort. The one-year forward price-to-earnings multiple of 19x is higher than the last decade’s average of 17x. While midcap and small-cap valuations are stretched, large-caps, particularly in sectors like financials, appear reasonably placed.

Market Insights by Kunal Vora, Head of India Equity Research at BNP Paribas

Kunal Vora noted that for mid-and-small caps, if they fail to meet elevated earnings growth expectations in Q2FY24, there is a risk of sharp de-rating.

The evolving global and domestic landscape presents multiple challenges for Indian equities, and investors are closely monitoring economic indicators and policy developments.

VoM News Desk

VoM News is an online web portal in jammu Kashmir offers regional, National & global news.