30/09/2024
The recent turmoil in the Indian stock market is attributed to several factors. Firstly, it reflects concerns about global financial tightening and potential elevated oil prices due to ongoing geopolitical tensions. This forward-looking market is factoring in these possibilities.
If global conflicts escalate or geopolitical tensions worsen, it could lead to reduced global economic activity and increased worldwide inflation. This is especially worrying if supply chains are disrupted, affecting production, as highlighted by the Federal Reserve.
The strengthening of the US dollar, driven by positive US economic data, has led to the depreciation of the Indian rupee. Additionally, the surge in 10-year US bond yields, recently reaching 5%, diminishes the appeal of emerging equity markets, including India, which may encourage foreign equity outflows.
Rising oil prices also have the potential to impact global GDP and inflation. A 10% increase in oil prices is estimated to result in a 0.15% reduction in global GDP and a 0.4% increase in inflation. A $10 per barrel increase in the Indian crude oil basket could widen the Current Account Deficit (CAD) by $14-$15 billion, equivalent to 0.4% of GDP, according to ICRA. The International Energy Agency suggests that a 10% increase in crude oil prices in India could lead to a nearly 0.9% increase in the Wholesale Price Index (WPI).
In 2023, oil prices started at $80.51 and rose to $91.07, a 13% increase from the beginning of the year. The projected year-end oil price is $100 (according to Moneycontrol), indicating a 24.21% increase.
With rising crude oil prices, inflation is expected to surge. To combat inflation, the Reserve Bank of India (RBI) may need to raise interest rates, potentially reducing spending and hindering the country’s economic growth. This situation also affects the profitability of Indian corporations.
Currently, two significant factors are influencing the Indian stock markets: domestic state elections and global macroeconomic uncertainties. The markets are expected to go through a corrective phase followed by consolidation, provided that global uncertainties do not escalate excessively.
At present, the Nifty 50 and Nifty 500 indices are trading at TTM P/E ratios of 20.84X and 22.00X, respectively. These figures indicate that both indices are trading below their five-year average P/E ratios, which stand at 23.42X and 28.61X. However, when considering the average P/E ratios since their inception, the Nifty 50 is trading below and the Nifty 500 is trading above the average, which is 21.49X and 20.44X, respectively. We expect that we won’t witness a significant correction in large-cap stocks from this point. Any potential correction is anticipated to be in the range of around 2.5-3.5% further. Our perspective suggests caution when dealing with small-cap and mid-cap companies that have significantly higher valuations in comparison to large-cap firms, especially when considering factors such as earnings growth, fundamentals, and financial stability. Additionally, we recommend maintaining a cautious stance towards the SME (Small and Medium-sized Enterprises) segment. We anticipate a potential further correction of around 5-7% in the Nifty 500 index.