Rising oil prices that are closing on $80 per barrel mark once again and a sliding rupee that is nearing an all-time low of 73 to a US dollar have dented the stock market sentiment with the S&P BSE Sensex slipping nearly 1,000 points in the last two trading sessions.
The developments have made analysts cautious, who suggest investors’ should book partial profit at the current levels and avoid fresh investment in the markets till rupee and oil prices stabilise.
Given the higher interest rate environment and weakening macroeconomic fundamentals (GST collections running below expectations fanning concerns on the government’s ability to meet fiscal deficit targets, a record-low rupee, a rising oil price environment, etc.) ahead of the elections, analysts at Credit Suisse, for instance, believe that the equity market could see some de-rating in the near-term.
“We advise investors to book some profits in equities. We now expect some correction to set in – even in the large-cap space – as we believe consumption growth to slow down given inflationary pressures from a significant INR depreciation as well as from a higher oil price environment. Given these challenging times, we advise investors to cut beta in their portfolios,” wrote Jitendra Gohil, Head of India equity research at Credit Suisse Wealth Management in a recent co-authored report with Premal Kamdar.
Over the last two sessions, total investor wealth, measured in terms of the market value of all listed stocks on BSE, fell by Rs 4.16 trillion to Rs 153.24 trillion, data reports. The market capitalisation (market-cap) stood at Rs 157.40 trillion on September 7, 2018.
While the outlook for the rupee is still fragile given accelerating global inflation and tightening monitory policies, especially by the US Federal Reserve (US Fed) and the upcoming tapering of an asset purchase program by the European Central Bank (ECB) from December onwards, analysts believe the rupee could stabilise as they expect heightened intervention by the Reserve Bank of India (RBI).
“I expect the markets to remain under pressure for some more time – at least oil prices and rupee find some support. The rupee, I feel, should stabilise between 72 – 73 levels. Investors should book profit and stay away from the markets for now. In a worst-case scenario, the Nifty50 index could slip to 10,700 levels, which is also a strong support level for the index,” says U R Bhat, managing director, Dalton Capital Advisors.
In terms of asset allocation, Jagannadham Thunuguntla, senior vice-president and head of research (wealth) at Centrum Broking suggests investors look at export-oriented sectors to take advantage of the falling rupee.
“The 'sentiment risk' is now the major challenge for stock markets. Investors need to be careful and should try to buy into export-oriented sectors and zero-debt companies. It has been a major paradox in India since 2014 till 2018. During 2014-17, the macros were all looking up and enviable but company earnings were lagging. In a reverse now, there is an evidence of a pick-up in earnings but macros are now under pressure. We haven't had a synchronized uptick in both macros and earnings,” he says.
Going ahead, Credit Suisse expects auto and auto ancillary, cement/chemicals, metals and mining sectors to outperform. It maintains a neutral stance on healthcare, consumer, energy/utilities, capital goods/industrials and information technology (IT) sectors; and expects financials and telecom to underperform.