Brace for volatility

A combination of factors can keep stock prices volatile

Political and geopolitical uncertainties will overshadow normal economic considerations for investors until the middle of 2024 or longer. Global financial markets are bracing themselves for bouts of unpredictable volatility due to the escalation in stress triggered by the Israel-Hamas conflict. This has meant new fears of disruption in energy supply, and it may impact activities in other ways in an anaemic global economy. Where India is concerned, domestic political uncertainties may also contribute to wild swings in sentiment. While there may or may not be a pickup in consumer sentiment during the upcoming festival season, and the trends visible in Q2 corporate performances will be carefully analysed, worries on these grounds will have a greater impact on sentiment. The Israel-Hamas conflict has already led to higher prices of crude oil and gas while the Ukraine war continues to lead to turmoil in metals markets and tightness in global food markets as well. In the midst of this, China reporting slow growth and weaknesses in the construction and real estate sector is also cause for serious concern, given the very high levels of indebtedness in giant real estate developers like Evergrande. High prices of energy can push up the inflation rate, along with putting pressure on external deficits and currency.

Some corporate analysts believe that there has been a pickup in consumer sentiment despite an erratic monsoon. Given the impetus of election-related spending, and the upcoming festival season, the second half of 2023-24 is likely to see some acceleration in consumption. As of now, India’s stock market is holding up well. But the attitude of foreign portfolio investors (FPIs) has turned distinctly cautious. The US Federal Reserve’s recent statements have been hawkish, ruling out chances of quick monetary easing. FPIs have sold a net Rs 22,700 crore in the past two months after being heavy buyers earlier. They are still net buyers to the tune of Rs 1.38 trillion in 2023-24 — the risk-off shift came after the Fed turned hawkish in its statements. Domestic institutions (ex-mutual funds) have been steady buyers. Mutual funds also continue to see smooth inflows, indicating that retail investors are still positive on equity. There has also been buying in smallcaps, along with a revival in primary market activities, both of which indicate retail strength. The Reserve Bank of India is unlikely to switch its tightening monetary stance under the current geopolitical conditions, though it may continue to hold interest rates.

The other big issues for most investors would be political stability. The Bharatiya Janata Party-led government has provided continuity for almost 10 years, and markets everywhere tend to be generally pleased with political stability. But India is now heading into a series of critical Assembly elections, followed by the Lok Sabha election in April-May next year. Until the shape of the next government is known, investors will be uncertain about the thrust of future policy, which can shift, depending on the configuration of the next government. In terms of valuation, India’s markets are not cheap at the moment, though the major indices are valued at lower average price-to-earnings multiples than their historic peaks. Volatility is thus more or less certain until the global situation becomes less fraught and the domestic election season is over. Investors would do well to remain cautious under the circumstances.