Market uncertainty to continue

Equity markets plunged to their seven month low as escalation of Russia-Ukraine conflict led to Brent crude and other commodity prices surging to multi-year high, thus invoking inflation fears.

Markets have clearly been under pressure over the last one month with Nifty making its fourth consecutive weekly losses. It made a low of 16,133 on Friday but managed to close at 16,245 - just above its previous week’s low of 16,203 – which had been acting as a near term support.

For the week, Nifty/Sensex plunged 413/1525 points, down 2.5% and 2.7% respectively to close at 16,245/54,334. Midcap100 too witnessed selloff and was down 1.6% while Small100 sharply outperformed as it was down only marginally by 0.4%.

Among sectors, metals and energy were clear gainers benefitting from record touching commodity prices while IT gained from the depreciating rupee. Media ended flat while rest all sectors witnessing selling with auto nosediving 9% followed by Banking – down around 6%.

Global markets too tanked as elevated Russia-Ukraine war has led to imposition of more sanctions on Russia by Western countries which has created fear of supply chain disruption, thus denting investor sentiment.

Brent crude prices surged to 9-year high of $120/bbl while other commodity prices touched multi-year highs. Further Russia’s attack on Ukraine’s nuclear plant created more panic and fear.

In the near term, weakness in market is likely to continue as the Russia-Ukraine conflict has resulted in a global risk-off. Equity markets are undergoing intermittent bouts of correction and elevated volatility.

The uncertainty over the duration and magnitude of the conflict could keep the market jittery and dependent on news flow. FIIs continue to remain net sellers in India as the global risk-off sentiment and the geopolitical situation have added to concerns of inflation, higher bond yields, and global rate hikes.

From India’s viewpoint, a sharp spike in crude oil prices (Brent above $100/barrel) poses key risks on the external balance front and can play spoilsport. For now, the sanctions imposed on Russia have excluded the Oil trade.

While it is difficult to predict the end of Ukraine conflict, higher crude oil prices, if sustained for an elevated duration, can result in higher inflation, current account deficit, bond yields, and interest rates in India and thus impact macro-economic stability.

Apart from the Russia-Ukraine conflict, several other factors are also impacting the market volatility. On the domestic front, the assembly election’s exit polls would be out on March 7 (Monday) evening while the election outcome would be there on March 10 (Thursday) which would be key events closely monitored. On the global front, US Fed meeting would have a bearing on global economy.

Post the recent correction, the Nifty is now trading at 19x 12-months forward P/E, which is lower than its 10-year average for the first time since Nov’2M0. Corporate earnings remained resilient despite the challenges with 3Q/9MFY22 Nifty earnings growing at 25%/45% and forward estimates remaining stable. The healthy earnings visibility can act as a cushion in an otherwise fragile external situation and the recent correction has led to moderation in valuation.

(The writer is Head-Retail Research at MOFSL)

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