New Delhi Prateek Gupta, Chief Executive and Co-Head, Kotak Institutional Equities said, “With the season of results behind us, external risks will drive market fundamentals forward. While supply side inflation can be brought under control, demand side inflation will be a major challenge. Risks from global recession, rising interest rates and high oil prices are major challenges and with markets still trading at higher valuations, foreign funds will continue to reduce their positions, he said in an interview. Edited excerpt:
What will be the impact of fourth quarter earnings on the markets?
At the composite index level, our FY23 and FY24 NIFTY earnings estimates have not been heavily impacted by the March quarter results, which are approximately 14% and 13% year-on-year growth, respectively. Meanwhile, on the margin side, many earnings fall has already happened and they are already priced, unless commodity prices move even higher, which is unlikely from here on out.
What are the major factors affecting the markets?
The bigger concern are the global factors that will affect the markets significantly. For the first time ever, global investors are expecting a recession instead of stagflation. The stagflation recession environment will be more negative as you will see high inflation and very little growth. The big call right now is how quickly US and global inflation gets under control. Also, what part of inflation is demand-side inflation versus supply-side inflation. By the end of this year, China and other major production centers will begin to normalize and supply-side inflation will begin to come under control. However, how demand-side inflation progresses with the rise in interest rates and liquidity measures need to be tightened. Another 200 basis point increase by the Fed and a price hike of at least 125 bps by the RBI are being priced in, but there are concerns for market participants that this may not be enough to control inflation and higher rates. An increase in growth can affect growth, and therefore cause a slowdown.
What will be the effect of oil prices on the market?
Oil price is a unique, India specific issue. In all major emerging markets, we are very sensitive to oil prices and every $10 increase in the price of crude affects our current account deficit by approximately 0.45% on an annual basis. So, if oil averages $120 a barrel in FY13, it will be a problem. But if it averages $90 a barrel, it is manageable for India. On a positive note, the slowdown in the US and Europe will keep oil prices under control. Even if China starts to grow rapidly after the easing of Covid restrictions, it is expected that oil will not go up too much. Supply could improve later this year through a combination of higher Saudi production and higher shale oil production and perhaps even Iranian oil when sanctions are eased.
What is your view on the valuation of foreign institutional investors and markets selling Indian stocks?
From a valuation perspective, India is not very attractive to global investors. Nifty is down 5% year-on-year, while MCSI Emerging Markets Index is down 14%. So, India has done much better. China is down about 17% year to date. Our market is trading at 19 times FY23 earnings and 17 times FY24 earnings which is still not cheap.