“We think an additional 5% correction (similar to the correction during the Russia-Ukraine war) is a distinct possibility in the near term, with small and midcap stocks at relatively greater risk,” Nomura said in a report dated March 16. “Adverse flow dynamics can drive markets even lower in the short term. Domestic equity inflow growth has slowed down in the recent past. The valuation threshold for FIIs is lower, aggravated by concerns about the impact of AI and higher oil prices,” it added.
The sustained geopolitical tensions in the Middle East following the attack on Iran present a material risk to the oil and gas supply chain. Shipments through the critical Strait of Hormuz have come to a standstill. These shipments are primarily related to oil and gas. The oil and gas shipments through the chokepoint account for more than 20% of global trade in these commodities.
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India remains heavily dependent on imports for crude oil, natural gas and LPG, making it particularly vulnerable to external shocks. The Strait of Hormuz alone accounts for around 43% of the country’s crude oil imports and nearly 63% of its LNG imports, highlighting the scale of exposure to this critical route.
Any disruption in supplies can have a broad impact on the economy, as most manufacturing industries are closely linked to the oil and gas supply chain. A sustained rise in oil and gas prices could derail the nascent growth recovery, push inflation higher and put additional pressure on the country’s external balance, Nomura said.
The Indian markets, with the Nifty as a proxy, have corrected 8% over the past two weeks. Such a sharp decline has been seen only twice in the past decade, during the Covid-19 pandemic in 2020 and at the onset of the Russia-Ukraine conflict in 2022.Valuations have also moderated meaningfully. In terms of price-to-earnings multiples and the spread over bond yields, the market is now at the lower end of the range seen over the past four years, the brokerage said.
“Therefore, a correction beyond 5% from current levels should present a buying opportunity from a long-term perspective, in our view,” analysts added.
Earnings at risk?
A sustained high energy price environment is likely to weigh on FY27 earnings. If oil prices remain around $100 per barrel, aggregate corporate earnings could see a downward revision of 10-15% compared to current consensus estimates.
At present, consensus expectations factor in earnings growth of around 16% for FY27 (BSE 200+). However, such cuts could bring growth down sharply, resulting in flat to mid-single-digit earnings growth for the year.
FII selling to worsen?
FIIs have been net sellers, particularly in the secondary market, over the past two years. To start with, elevated valuations were a concern. This was followed by the emergence of the AI trade, where India is perceived as a net loser. Investors are concerned about the IT outsourcing business model, which could impact the broader economy. Elevated oil prices now present an additional headwind to sentiment. “Against this backdrop, we think the valuation threshold for FIIs is likely lower than in the past.”
Domestic inflows have been the bulwark of the equity markets in India. SIP flows have remained resilient, driving consistent positive inflows into mutual funds. However, Nomura says there has been a slowdown in inflow growth rates in the recent past. If the crisis prolongs, domestic inflow growth may slow further.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
