As if the global economic slowdown and trade wars weren’t enough, equity markets are traversing another bout of volatility due to mounting tension in West Asia.
Compounding the situation further have been the rise in oil prices and the depreciating rupee, which could further delay the chances of an earnings recovery.
Oil prices have already spiked about 13% internationally in the last two days owing to supply disruptions in Saudi Arabia.
As India still depends heavily on oil imports, an oil price hike hurts not only India’s macro accounts, but also business growth sentiments.
After a washed-out first quarter, analysts were hopeful that green shoots of earnings growth would be seen in the second half of FY20.
But with oil playing truant, an earnings pick-up in the second half may now be elusive.
Indian markets can absorb a bit of the oil price hike. But as Reserve Bank of India governor Shaktikanta Das pointed out in a recent interview, rising oil prices may have some impact on the current account deficit and the fiscal situation if the issue persists. The rupee has weakened by about 50 paise against the dollar this week.
The weakening macro outlook comes on the back of on an already weakening earnings outlook. Already, foreign brokerage firms have been saying that analysts’ consensus growth estimates of about 21% in FY20 are at great risk.
If the fall in earnings estimates continues, the Nifty’s current valuation may be much higher than the Street forecasts, as the chart alongside shows.
“Based on our new top-down earnings model (UBS STEP model), our forecast for earnings growth is 14% YoY for both FY20 and FY21, driven largely by financials. The Nifty’s one-year-forward PE multiple has been de-rated to 16.9 times, above its five-year average but no longer above +1 standard deviation. Off our top-down estimates, the Nifty still trades at 20 times 12-month-forward PE," said UBS Securities India Pvt. Ltd in a 12 September note to clients.
Of course, the situation could be contained if oil does not escalate much beyond this. Indian markets could become more vulnerable if oil crosses about $75 a barrel.
“If the volatility in crude prices continues for some more time and oil price goes above $75 and stays there for a week or more, it may lead to postponing decisions and businesses would play safe and look inward, and this may lead to further dampening of growth prospects," said Deepak Jasani, head retail research, HDFC Securities Ltd.
The worries about oil taking markets on a slippery aside, Indian markets are also dealing with the news of a default by non-banking finance company Altico Capital, and its rub-off effect on other NBFCs and banks.