What explains recent resistance to multiple headwinds in the stock markets

Domestic equities have held their ground, with the Sensex up nearly 13% from 2022 lows of 52,843 on March 7 even after the last three days of correction

Despite headwinds such as persistently high oil prices, unwinding of the post-pandemic stimulus programme by the US Federal Reserve and no signs of thaw between Russia and Ukraine, domestic equities have managed to hold their ground. The benchmark Sensex is up nearly 13 per cent from 2022 lows of 52,843 on March 7 even after the last three days of correction. On Monday, index reclaimed 60,000 for the first time since January 19. So what explains this resilience shown by the Indian market. Morgan Stanley in a note has highlighted six factors that indicate some fundamental shifts in market structure and dynamics:

Election results and policy: It says the recent state election results have boosted the government’s policy thrust, which includes lifting share of corporate profits in the GDP and encouraging private investments.

A new profit cycle and the domestic bid: The brokerage says there are clear indications that India Inc profit growth is entering a new cycle. It expects return on equity (RoE) to improve significantly going ahead. This, according to Morgan Stanley, is a reason behind strong inflows from domestic investors in the stock market.

MNC sentiment, FDI and capex: It says multinational company (MNC sentiment towards India is at an all-time high thanks to direct incentives from the government to invest in the country. This is translating into a secular rise in foreign direct investment (FDI), which in turn is likely to lead to a new corporate capex cycle and, hence, growth, says the brokerage.

Macro funding shift: Morgan Stanley says the increase in FDI relative to foreign portfolio investor (FPI) flows implies an important shift in the funding of India's current account deficit. “It is now less sensitive to global capital market conditions,” it says. According to data, the trailing 24-month gross FDI into India (both equity and debt) is around $160 billion versus FPI inflow of less than $10 billion.

Increased policy flexibility: It says India now enjoys increased policy flexibility to address domestic challenges. “We can see this in both fiscal and monetary policy. The government is running a higher-than-usual fiscal deficit, with no urgency to reduce it, and the RBI is able to persist with negative real rates even as the US Fed has exited its easy monetary policy,” say Morgan Stanley strategist Ridham Desai, Sheela Rathi and Nayant Parekh in a note.

Oil, a variable with linear implications: The brokerage says the impact of the volatility of oil prices on both the macro and markets is reducing on account of falling intensity of oil in the GDP and cheaper oil sourcing. “While India continues to be exposed to global energy prices, the effect of rising oil prices, especially due to supply shocks, is now mostly linear rather than non-linear, given the change in current account funding.”