Historically, Indian equities have entered bear markets when the US has slipped into recession, foreign brokerage, Morgan Stanley said in a report.
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, it said.
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.
“We have been worried about profit margins, and this remains a point of focus as we head into another earnings season. Our F2023 earnings estimates are still 5 per cent 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,” Morgan Stanley said.
There could be 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 it has missed out on one of the best performing large equity markets in the world.
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, the report said.