While in the medium term, geopolitical development and other macroeconomic factors like inflation, US Fed decision, and state election results could cause volatility and drive the market performance, the long term story for the equity market is intact.
Indian equity markets have been witnessing high volatility as investors assess the Russia-Ukraine crisis and assess the impact of resulting sanctions on the global economy. The escalating geopolitical tensions have pushed the equity market into red. Benchmark index Nifty 50 has declined by 5.19% so far this year. While in the medium term, geopolitical development and other macroeconomic factors like inflation, US Fed decision on interest rates, and state election results could cause volatility and drive the market performance, analysts at Axis Securities believe that the long term story for the equity market is intact. The brokerage maintained the December 2022 Nifty 50 target of 20,200.
Immediate concerns: Crude oil prices, inflation, sanctions on Russia
According to Axis Securities analysts, prolonged periods of geopolitical uncertainty which may increase oil prices even more than the current levels is one of the major concerns at the moment as it could worsen the current inflation problem further. Oil prices have already crossed $100 per barrel mark last week. Based on the current development, this would be a negative factor for global trade and pose a downside risk to global economic growth. Meanwhile, if strict sanctions are imposed on Russia by the US and other western countries, it would make it difficult for Russia to export oil to the global markets which will ignite a further rally in crude prices.
“Such a scenario will pose challenges to the oil-importing countries, especially India, to maintain the trade deficit and the foreign exchange reserve. The rise in crude prices could delay the cool-off in the inflation in the domestic market which was earlier expected to moderate in the second half of 2022,” the brokerage note said. This would further increase raw material prices, which in turn, would intensify margin pressure that Indian corporates are facing at the moment.
US Fed may slow the pace of rate hiking
Analysts at Axis Securities believe that once the dust settles between the Russia- Ukraine tension, the market is expected to refocus on earlier key events like inflation and central banks’ view on the number of rate hikes in the current calendar year. “The US Fed stance in the upcoming FOMC meeting would be the deciding factor for the market direction over the near term. Given the present context, Oil will be the dominating factor in the FED’s analysis of the prevailing situation. On the possibility of a cut in global growth, the FED may slow the pace of rate hiking,” they said.
However, the possibility of an aggressive Fed stance cannot be ruled out. They believe that the wider view is that central banks’ first focus will be more on controlling the inflationary effects rather than the growth effects. “We believe the present macroeconomic developments are leading to volatility in all major asset classes including Equity, Debt, currency and Gold and the volatility is here to stay for some time before it concludes in a concrete direction,” the note said.
Long term story for equity market intact
Analysts maintained a Nifty target of 20200 for the end of this year as they believe that the long term story for the equity market is intact since the favourable structure is emerging due to an increase in Capex spending which will enable banks to improve the credit growth. They expect the overall boost in the budget expenditure to help deliver broad-based growth in FY23.
According to the brokerage note, the earnings momentum would be the critical factor for the market performance, though it has been strong in the past few quarters and largely in line with expectations for the current quarter. “While in the medium term, geopolitical development and the other macroeconomic factors such as inflation and the US FED decision in the interest rates and state election results are the key events in the near term that could drive the market performance,” the Axis Securities note said.
Top stock picks:
Large caps: Tata Consultancy Services (TCS), Vedanta, Coal India, SAIL, and State Bank of India (SBI)
Midcaps: Oil India, Canara bank, Dalmia Bharat, Persistent, Chola Investment & Finance
Smallcaps: Finolex Industries, Birla Soft, Chambal Fertilizer, Redington India, Gujarat Narmada Valley Fertilizer
What investors can do now?
Analysts at Axis Securities believe this is an opportunity of investors to pick up quality stocks at a reasonable price. “Quality as a style is a promising theme that provides a flight to safety and lower volatility in the longer run. Quality companies come up with superior return ratios and lower earnings variability, which in turn, help them to perform consistently in all market cycles,” they said. Especially in the longer run, quality never goes out of fashion. “We believe ‘Quality at a reasonable price’ offers greater comfort and provides superior long term risk-reward in the current environment,” they added.