Investors must fasten seat belts for equity market to remain turbulent

By Animesh Deb

New Delhi, Mar 12 (IANS): Downtrend in Indian equities is far from over as the ongoing perfect storm in Russia-Ukraine geo-politics is yet to retreat.

The geo-politics has taken crude oil prices to an over decade high, and industrial metals and precious metals to multi-year highs, indicating a likely steep rise in inflation across the globe.

Potential restrictions and sanctions on trade with Russia has led to a spike in the industrial commodities like aluminum, iron ore, steel, nickel, among others.

"Russia-Ukraine led crisis has escalated commodity prices as Western sanctions have disrupted air and sea shipments of commodities produced and exported by Russia. It has significantly impacted the profitability outlook for cement, capital goods, high and low discretionary consumer durables, FMCG, logistics and paints or adhesive sectors," said Vinit Bolinjkar, Head of Research at Ventura Securities.

Though the key Indian indices have seen some minor rallies during the week that ended on Friday, which analysts believe would be short-lived as the sentiment was boosted by the State poll results.

"We believe the markets would remain volatile in the near term amidst the tension between Russia and Ukraine. Moreover, the US Fed meeting is also expected to induce volatility in the markets next week," said Ajit Mishra, VP- Research at Religare Broking.

Taking inflation concerns into consideration, market participants widely expect a monetary policy tightening -- 25 basis points hike -- by the US Fed in its upcoming meeting slated to be held during March 15-16.

Any rate hike by the US Fed turns the US market attractive for investors, and typically some fund outflows from the emerging markets can be witnessed.

Not just in the US, back home, the Reserve bank of India which was reluctant to raise interest rates to support growth will have to respond aggressively and any subsequent increase in interest rates will impact the borrowers, said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.

Policy rate hike essentially pulls out excess liquidity from the economy which in a way helps in managing inflation. "Investors should maintain a selective approach and stick with large caps for now. Among the sectors, they may consider nibbling in large IT and banking names on dips for the long term," Mishra of Religare Broking said.

Rajnath Yadav, Research Analyst at Choice Broking said: "Still there is no indication of the war coming to an end, thus we feel that commodity prices will be at elevated levels at least for the next 3-6 months. Inflation in the US is around 8 per cent, which will force the US Fed to normalize the policy interest faster."

In such a scenario, Yadav believes there is a high probability of major global economies going into a "stagflation phase and maybe followed by a recession".

"Anticipating such economic conditions, equity markets across the globe have reacted negatively and currently are trading lower at around 10 per cent from their respective high levels. Going forward, in the very near term we are not anticipating any change in the investor sentiment, unless there is ease in the geopolitical tensions and related sanctions."

At this junction, analysts recommend equity investors to buy quality stocks on dips.


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