Oil, oil, oil: Global headwinds are the biggest risks to Indian stock markets, say veterans at Samvat 2079 Roundtable

Chokani added, “Unfortunately, we've not solved the energy problem in India for 30 years, nor have we built a big tourism inflow,” he said, adding that the country is dependent on remittances. According to Chokani, the stock markets will quickly rebound from shocks such as a war or the pandemic, but there are structural longer-term concerns that need to be addressed.

Kela agreed with Chokani that the country needs to deepen its oil-exploration efforts.

To manage the surge in oil price, India had found an alternative source in Russia but that he said won’t be a sustainable solution since the discounts offered could be withdrawn anytime. The country has to deepen its energy sources, like what is being done in the ethanol industry, he said. That solves many problems at one go, by giving farmers better prices, by sourcing clean energy and by encouraging domestic production (to move towards energy independence), he added.

Jain added to the point, saying that rouble settlement of purchases from Russia will act only as a temporary, “accounting” fix. India and Russia had set up a rupee-rouble settlement mechanism to make bilateral trade payments in the respective local currencies, thus reducing their dependence on the dollar. But India continues to pay in dollars for Russian oil.

“I don't think rouble will solve the problem (of vulnerability to oil imports) because it does not fundamentally alter your inflow-outflow situation, because roubles will also need to be earned,” said Jain.

Conflicts and rate hikes

Apart from the oil risk, any other major conflict that could break out between nations was cited by Kela as a major risk and US interest rate trajectory was cited by Jain.

Kela said, “Another major conflict is a real big worry from a market perspective, because markets have not discounted that.”

Jain said that the cost of capital in the US may settle higher because of higher cost of imports, higher rents and higher cost of services. The first will be from the working-age population in China de-growing and wages rising, which would make it harder for the US to import lower-priced goods from China. Secondly, with interest rates going up, mortgage yields will go up and therefore rents will go up. Thirdly, growth in working-age population in the US is falling and that would imply higher wages for service industry. Therefore, the country would face structurally higher inflation.

While this may not be “catastrophic for India” because a similar situation played out in 2005 when the cost of capital was at similar levels, it will make India “vulnerable to any disruption in capital flows”. If capital flows go down as oil prices fall in response to slowing global growth, then they may cancel out each other. But, if capital flows go down and oil prices rise, then “it could be quite challenging for India”, he said.

Sunil Singhania, founder of Abakkus Asset Manager, said that what he was worried about are the risks that have not been discounted by the market.

“I think all of us have analysed and micro analysed a lot (of these risks) including oil, inflation, currency and so on. But what has hit us (the hardest) have been risks we had not thought about, like the Russia-Ukraine crisis or the pandemic. So frankly, I am not worried about the risks that we know about. It is the risk which we are not discounting--which can be like a six sigma event—that I am I'm worried about,” said Singhania.

Founder and Chairperson of First Global, Devina Mehra too suggested that most of the known risks are already discounted in the price in the US or Canada market.

Also read: Brokerage recommendations for Samvat 2079

Domestic red-flags

Then, Mehra pointed to a longer term risk in the Indian stock market. She said that there is still distress in the domestic economy, which is reflected in the per capital income that has not crossed the 2019 level; in the number of people seeking MNREGA jobs or free rations; and in the two-wheeler sales figures that last year was the lowest in nearly in a decade. These indicators and the underutilised demographic dividend, which comes from the shortage of jobs to give people of working age, were worries for her for the longer term.

She said that her view on the stock market in the near term was more sanguine, and the risks she saw for the market in the medium- and long-term were more to do with these domestic factors than with global headwinds.