For India, a net oil importer, high crude oil prices are expected to wreak havoc on its macro-economy. Although India’s direct exposure to Russia and Ukraine in terms of trade is not large, as expected, there is an oil shock as the conflict drives up the prices of this crucial commodity.
As Brent continues to hover above the $120 a barrel mark, there are fears that India will suffer in the form of soaring retail inflation and a widening deficit from the current account. Moreover, with the Indian rupee hitting a new low, the pressure on imports is likely to increase.
Needless to say, these factors make investors nervous.
It’s no wonder foreign research house Credit Suisse downgraded India to an underweight rating from an overweight. “Rising oil prices are hurting the current account, adding to inflationary pressures and increasing sensitivity to Fed rate hikes,” he said in a report.
While India is struggling, its better placed emerging market peers are poised to gain. “We are using the funds released from India to move China from market weight to overweight,” the Credit Suisse report added. According to the foreign research house, although China’s credit intensity is still clouding the long-term outlook, its low oil import bill, protection against Fed rate hikes and improving indicators macroeconomics are some of the positive aspects that they appreciate.
Emerging market equity funds tracked by EPFR recorded their 11th consecutive inflow in the week ended March 2, as investors remained loyal to groups of funds dedicated to the Greater China universe – China, Taiwan and Hong Kong – said fund flow tracking tool EPFR Global in its weekly. report on March 4.
By contrast, BRIC (Brazil, Russia, India and China) equity funds experienced their second consecutive week of massive redemptions, posting their biggest outflow since the middle of 4Q20, the EPFR report added.
Indian companies that depend on raw materials based on crude oil are now exposed to an increased risk of gross margin squeeze. Even if they raise prices to protect margins, weak demand means weaker volume growth. Despite the risk of a downward earnings revision, Indian equities are not cheap. It could also be one of the reasons why investors may ditch Indian stocks for cheaper options.
“Notwithstanding the market’s recent sharp downtrend; at 18x P/E/2.8x P/B, Nifty’s valuations are still above its long-term average,” the analysts said. analysts at Jefferies India Pvt. Ltd said in a report on March 8.
The report adds that, on a relative basis, the Indian market continues to trade around 15% premiums to historical despite the recent underperformance against ASEAN (Association of South Asian Nations). Southeast), etc.
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