Is the global sell-off just a tantrum rerun?

The MSCI India Index has performed relatively better and declined only 1.32% in 2022. This compares with a 27% rally in 2021. As a result, the fear gauge, CBOE Volatility Index (VIX) and NSE India VIX indices have gained 66% and 32%, respectively, so far in the calendar year 2022 (CY22). In CY21, they fell 24.31% and 23.10% respectively.

Against a backdrop of increased inflation, concerns remain about the US Federal Reserve raising interest rates sharply and ending its bond repurchase program. Nearly 44% of global fund managers surveyed by BofA Securities this month said they view central banks as the biggest risk exposure to their portfolios. The number was 42% in the December survey.

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Deepak Jasani, Head of Retail Research, HDFC Securities Ltd said, “The selloff we are witnessing in global equities may start as a taper tantrum followed by further cuts.” A two-day FOMC meeting was going on when this article was being written.

“The bears are winning the tug of war with the bulls to start 2022, as uncertainty around Covid, earnings, inflation and (central) bank policy fuel sales. In a weekly note on January 25, Saira Malik, Chief Investment Officer and Head of Equity, Nuveen Asset Management said that the downward pressure on equities does not necessarily signal the end of the current bull market, but the arrival of “Tantrum 2.0”.

Equity investors are also facing other concerns, such as slowing global growth and uncertainty about coronavirus variants. “Even though markets have concluded that Omicron does not pose a significant long-term threat, we expect volatility to increase with each respective headline. Fears of economic sanctions may remain an unwanted overhang for global equity markets. It is,” said Malik.

In its latest outlook, the International Monetary Fund (IMF) has cut its forecast for global economic growth due to an anticipated slowdown in growth in China and the US. The global economy is now growing at 4.4% in 2022, lower than the previous forecast of 4.9%.

In addition, geopolitical tensions have made a comeback with the escalating conflict between Russia and Ukraine. With inherent major volatility for energy, grain, fertiliser, metals, rates and FX, the market significantly reduces the odds of an impressive war taking place on Ukraine. This is a metacrisis that will see an acceleration towards a different globalization in which the US can still thrive, but with great challenges for many others, including the EU,” Rabobank analysts said in a report on January 25.

Jasani sees any escalation in the Russia-Ukraine conflict as a major risk to India, especially with regard to oil prices, which are already high. Brent crude oil prices have risen nearly 60% over the past year to around $89 a barrel, which is detrimental to a large oil importer like India.

but that’s not all. “Corporate earnings have been mixed, with more negative surprises so far. If the Budget disappoints, we may see foreign investors curtailing investments in Indian stocks, which means a prolonged market slump and High volatility, which reduces the valuation of Indian equities,” Jasani said.

Currently, valuations of Indian stock markets are expensive. Data from Bloomberg shows that MSCI India trades at a one-year price-to-earnings (PE) multiple of 21, which is much higher than MSCI Asia Ex-Japan’s PE of 12 times.