Indian Markets Face Troubling Headwinds Despite Political Certainty, Says Chris Wood

BJP's landslide victory to retain India's biggest state sets the party up well for 2024 elections, but the stock market faces 'troubling headwinds', according to Jefferies Chris Wood.

In his latest Greed and Fear Report, the market veteran said that had it not been for domestic fund flows absorbing net foreign selling, the Indian stock markets 'would certainly have corrected much more year-to-date'.

Foreign investors have sold a record net $14.9 billion worth of Indian equities so far in this quarter.

Monetary Tightening Amid High Oil Prices

Chris Wood identified an inevitable monetary tightening cycle as a major worry for Indian stock markets. The need for rate hikes may be more pronounced due to higher oil prices.

Jefferies expected the government to pass on higher oil prices to end-users, as the state assembly elections are over. A complete pass-through of the oil price rise would add 60-80 basis points to retail inflation.

Terming the RBI's decision to begin rate hikes at its last policy meeting in February as a mistake, Wood said that Jefferies expects RBI to hike rates by at least 25 basis points at its next policy meeting in April. Rates could be hiked three to four times in the same measure over the next 12 months.

Stress Due To Higher Oil Prices

If oil prices are assumed to remain nearly $90 per barrel for the financial year 2022-23, the current account deficit would hit a decadal-high of 2.8% of GDP while crude prices at $110 per barrel could lead a deficit of 3.5% of GDP, according to Jefferies.

This, in turn, is putting pressure on the rupee.

However, Chris Wood added that the strong rebound in non-oil and gas imports pointed to the economic recovery after Delta wave. The Indian economy could clock 7% growth in the FY23 if oil remains at around $100 per barrel.

Jefferies' estimates India to grow at 7.5% in real GDP terms in FY23, down from an estimated 8.5% in FY22.

Energy, Real Estate Stocks In Focus

"GREED & fear would view any sell-off in oil-triggered by a negotiated settlement in Ukraine as an opportunity to add to energy stocks given the fundamental lack of supply", Chris Wood in the Mar. 17 note.

Chris Wood also added that Jefferies will continue to maintain the big exposure to property stocks in India's long-term portfolio as the long-term call remained intact.

'Fed Had No Choice But To Start Raising Rates'

Given the latest inflation data in the U.S. and the war in Ukraine which has led to surge in commodity prices, the U.S. Federal Reserve had no choice but to begin the monetary policy normalisation.

Chris Wood also noted that while the Biden administration diverted blame on the surge in oil prices on Russia, the reality was that the 'inflation genie was already out of the bottle long before Russia's invasion of Ukraine'.

Jefferies believed that political pressure has been ramped up on the central bank to tackle the rise in oil prices and that the U.S. Federal Reserve's 'credibility is on the line'.