Are you comfortable upgrading your weightage on Indian stocks after the recent fall?
No, we have not increased our weights on Indian equities. Being a large importer of oil, the Indian economy is vulnerable to the recent increase in prices. As a growth market, valuations in India can also come under pressure from rising rates. With the recent global developments, JP Morgan has revised its commodity forecasts higher. Every $10 (per barrel) increase in oil results in an outflow of about 0.4% of GDP from India annually. This is likely to hurt private consumption, government expenditure and corporate margins. Domestic pricing policy will help determine the amount allocation of this burden amongst these groups, but the drag from higher prices is unavoidable. Indian equities have tended to underperform emerging markets historically in periods of high oil prices. Market valuations are still higher than pre-pandemic levels.
What is your expectation in terms of returns from Indian stocks this year in the wake of risks?
Our base case is for close to zero returns from headline Indian equity indices through 2022. We expect the growth in earnings to be compensated by a correction in multiples this year. Valuations are very vulnerable to heightened global uncertainties. A combination of higher rates, tighter liquidity and commodity inflation is likely to continue to exert pressure on asset prices. It is difficult to argue that these are already reflected in prices given multiples are still elevated.
Will the Russia-Ukraine conflict delay monetary tightening by central banks?
This is not the base case yet. The recent increase in prices worsens concerns on inflation. While growth outcomes can also deteriorate, central banks have the tough task of managing both. We expect the US Federal Reserve to effect seven rate increases through 2022, and quantitative tapering later in the year.
Do you expect foreign outflows from India to continue?
Flows are very difficult to anticipate but will most likely be determined by global macro factors. Tightening US dollar supply through 2022 and increasing dollar rates will reduce availability for EMs. FII inflows into India accelerated above trend in early stages of the pandemic and some of the recent outflow might be a reversal of that earlier phenomenon. It is possible that some money is reallocated to Chinese equities, but that is unlikely to be the only determining factor for market performance. Several regional economies tend to benefit from higher Chinese growth and could also see equity flows.