The Indian stock market has been quite volatile in the recent past. The expectation of interest rate hikes by major central banks, supply-side disruptions, and high inflation figures across the globe, have been the primary reasons for this volatility. Amidst this, the Russian-Ukraine conflict has intensified the uncertainty and volatility of the Indian stock market.
When the conflict started in February – The closing figures of the S&P BSE index and the Nifty 50 showed a 5% percent decline on 24th February. The S&P BSE index declined from 57,232 points to 54,530, while the Nifty 50 index went from 17,063 points to 16,247. The India Vix index, which measures the market’s anticipation of volatility and fluctuations jumped to 31 points, the highest recorded in over a year.
Coming to April, 2022 the NIFTY is still around 17,000 and S&P BSE index still around 56,907.32 as on April 19, 2022 closing.
Why did the conflict affect Indian markets?
The biggest challenge comes from elevated energy prices. The conflict has caused crude prices to remain above $100/ barrel. India being a net importer of crude, increased crude prices raises India’s import bill, widening the trade deficit. A deficit further translates to a depreciating rupee. Due to increased energy prices over and above elevated commodity prices, India is witnessing high inflation figures. High inflation chips off corporate profitability, dents demand, and stresses the rupee valuation. Fortunately, high export numbers and remittances give India the needed ammunition against a deficit and rupee volatility.
INVESTMENT INSIGHT – An interesting fact – India exports more IT services then combined crude exports from middle east countries. Thus, as a country our Balance of Payments (BoP) is always favourable.
High input costs cause investor concerns regarding corporate profitability. Moreover, geopolitical tensions, in general, create an air of uncertainty that equity investors dislike. Similarly, high inflation figures can cause capital loss for which investors seek higher yields in the bond market.
However, several indicators of economic resilience indicate that this could be the right time to buy into Indian private equities.
INSIGHT – A higher uncertainty also offers you good investment opportunities.
Bloomberg data on corporate earnings in Q3 of 2021-22 showed a significant uptick. Nifty 50 companies (excluding banks) reported a year-over-year increase in corporate profits and aggregated revenue of 30 percent and 23 percent, respectively. The aggregate revenue rose to Rs 16.1 lakh crore, the net profits increased to 1.64 lakh crore. As per the Bloomberg report, more than fifty percent of the aggregate revenue and profits in Nifty 50 companies came from the energy and financial sector. For the quarter ending in March 2022, strong earnings figures are anticipated by analysts. Similarly, higher crude prices, refining margins, and realisations would further boost the profitability of the energy sector.
The financial sector is expected to report robust growth in profits due to an uptick in retail disbursement. Furthermore, the economic recovery after a tough two years would have led to a reduction in stressed assets of banks.
Advanced estimates for 2021-22 released by NSO placed India’s real gross domestic product (GDP) growth at 8.9 percent, 1.8 percent above the pre-pandemic (2019-20) level. Major economic watchdogs, the likes of the Asian Development Bank have projected above 7 percent growth rates for India. India’s growth trajectory following the pandemic is not only strong but also stable. Amidst erratic policy changes in China last year, a sudden increase in covid cases in the region, and a war-like situation in Europe, India is viewed as a sought-after investment destination.
Signs of India’s economic recovery can be viewed in the recent trend in inflows from foreign portfolio investors. FPI’s infused Rs 7707 crore in Indian equities in April – making them net buyers after sustained outflows in the last quarter. Foreign investors are viewing the current situation as a buying opportunity in the Indian stock market.
Union budget 2022-2023
The budget’s announcement of an increase in capital expenditure by 35 percent in key sectors like infra, IT, clean energy, and real estate will further aid the economy’s growth. More allocation to the PLI scheme and emphasis on domestic manufacturing is expected to be a fillip to growth. Moreover, the massive market borrowing target caused the bond yields to rally upwards.
Why is this the right time to invest in bonds?
Bond yields have been on the rise against the backdrop of the current geopolitical tensions. Due to the inverse relationship between yields and bond prices, a rise in bond yields is considered to be good news for bond investors. Higher yields represent higher incomes for new investors. Moreover, for existing bondholders, high yields could yield higher income in the long term and offset the capital loss due to a decline in prices.
- The surge in bond yields creates an opportune moment to buy bonds at price corrections.
- Moreover, as the RBI has delayed a rate hike and is expected to keep an accommodative stance, for the time being, the possibility of bond prices showing manic fluctuations is low. Hence, making this the right time to enter the bond market.
- The union budget announcements and strong earning figures of companies, as mentioned above, indicate that businesses are going to augur well in the coming future. This indication will make corporate bonds quite attractive as an investment instrument as good business translates to lower default risks on interest and principal repayments.
- The crisis and the accompanying stock market volatility make bonds a much-needed instrument in an investment portfolio. Greater dependence on equity could reap short-term losses due to the prevalent volatility. A diversified portfolio with bonds present will help absorb the losses better. Moreover, as gold prices rally, this is a great time to consider sovereign gold bonds.
- India’s merchandise exports hit a record high of USD 418 billion for the 2021-22 fiscal year. This trend is expected to continue on account of a recovery in global demand, increased interest in Indian exports, and a depreciated rupee. The major contributing sectors have been engineering goods, chemicals, gems and gold, electronic products, and petroleum products. Thus, the long-term growth prospects remain resilient. Investors should make the most of the depreciated bond prices.
- Some industries that are showing greater resilience than others during the current crisis are the IT, financial, and agriculture industries.
- The tensions in Europe and China could reroute exiting the business to the Indian IT sector. The finance industry is already recuperating amidst recovery and increased lending. The agriculture sector has been the flagbearer of resilience throughout the current crisis. Due to a supply disruption of agricultural products from Russia and Ukraine, India’s agriculture industry could further get an export boost. Thus, it is the best time to invest in equity and commercial papers of companies from these industries.
The Russia-Ukraine crisis has had several repercussions on the Indian economy and markets. High commodity prices, crude prices, and supply disruptions continue to be matters of concern for policymakers. Investors have shared this concern. The decline in the stock market and increased bond yields were evidence of this. However, several macro indicators show that India is poised to withstand all challenges. Experts and policymakers alike share this sentiment. Such volatility accompanied by expectations of quick recovery present an opportunity to buy at discounted prices and benefit from wider margins once uncertainty reduces and markets bounce back.
Investors should avoid making any hasty financial decisions. While increasing exposure to bonds will be a wide investment decision considering the situation. At the end of the day, all financial decisions should be guided by your financial goals and risk appetite.
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