 "BSE, Sensex")
Latest bout of correction notwithstanding, the benchmark Nifty 50 index is set for its best quarterly show in one year. With one trading session left, the Nifty is currently up 7.5 per cent in the third quarter of 2022. The index had gained 15 per cent during the quarter, but it has given up nearly half of the gains as the surging US dollar and Treasury yields have triggered turmoil in risky assets. Volatility is expected to continue during the last quarter of the calendar.
“Indeed, the only safe forecasts for the coming quarter are heightened volatility and higher correlations across stocks within the Indian market and with other markets around the world,” said Morgan Stanley strategists led by Ridham Desai and Sheela Rathi in a note. They have listed out key concern areas for the market:
Rising US recession risks
Hardening of the bond yields in the US, particularly the shorter-tenured, is making a US recession look increasingly possible. Morgan Stanley said a US recession in the past has ushered the domestic markets into bear territory—a fall of 20 per cent from recent highs. “Historically, Indian equities have entered bear markets when the US has slipped into recession. 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 balance of payments (BoP). Indian equity return correlations with the rest of the world have risen in recent weeks and could remain elevated for now.”
Earnings disappointment
Many analysts are projecting lofty earnings growth expectations to justify India’s premium valuations. September quarter earnings season, which will kick off early October, will provide a reality check. “We have been worried about profit margins, and this remains a point of focus as we head into another earnings season. Our FY23 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.”
Domestic rates
With the rupee weakening against the US dollar, many fear a more hawkish pivot by the Reserve Bank of India (RBI). The rupee, which started the year at 74.34, has almost kissed 82 against the dollar. Meanwhile, the 10-year government security, which was below 6.5 per cent at the start of 2022, almost touched 7.4 per cent last week. If bond yields harden further, the risk-reward for equity investing will look more unfavorable. 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,” says Morgan Stanley.
Geopolitics and commodities
While recession fears have cooled off commodity prices, they are still up one a year-to-date basis. For instance, the Bloomberg Commodity Index is down 17 per cent from this year’s high in June but is up close to 15 per cent YTD. Prices may remain sticky if they are on account of supply side issues triggered by the flare up in geopolitics. “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 BoP,” said the Morgan Stanley note.
“Indeed, the only safe forecasts for the coming quarter are heightened volatility and higher correlations across stocks within the Indian market and with other markets around the world,” said Morgan Stanley strategists led by Ridham Desai and Sheela Rathi in a note. They have listed out key concern areas for the market:
Rising US recession risks
Hardening of the bond yields in the US, particularly the shorter-tenured, is making a US recession look increasingly possible. Morgan Stanley said a US recession in the past has ushered the domestic markets into bear territory—a fall of 20 per cent from recent highs. “Historically, Indian equities have entered bear markets when the US has slipped into recession. 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 balance of payments (BoP). Indian equity return correlations with the rest of the world have risen in recent weeks and could remain elevated for now.”
Earnings disappointment
Many analysts are projecting lofty earnings growth expectations to justify India’s premium valuations. September quarter earnings season, which will kick off early October, will provide a reality check. “We have been worried about profit margins, and this remains a point of focus as we head into another earnings season. Our FY23 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.”
Domestic rates
With the rupee weakening against the US dollar, many fear a more hawkish pivot by the Reserve Bank of India (RBI). The rupee, which started the year at 74.34, has almost kissed 82 against the dollar. Meanwhile, the 10-year government security, which was below 6.5 per cent at the start of 2022, almost touched 7.4 per cent last week. If bond yields harden further, the risk-reward for equity investing will look more unfavorable. 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,” says Morgan Stanley.
Geopolitics and commodities
While recession fears have cooled off commodity prices, they are still up one a year-to-date basis. For instance, the Bloomberg Commodity Index is down 17 per cent from this year’s high in June but is up close to 15 per cent YTD. Prices may remain sticky if they are on account of supply side issues triggered by the flare up in geopolitics. “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 BoP,” said the Morgan Stanley note.
