Despite delivering strong returns in Samvat 2080, with the BSE Sensex and NSE Nifty rising 23% and 24% respectively, the Indian stock markets encountered several challenges, including geopolitical tensions, persistent inflation, and foreign investor selling. As Samvat 2081 begins, investors face a complex landscape with emerging risks that could influence the markets in the year ahead. Here are five key risks to watch:
1. FII Outflows
Foreign Institutional Investors (FIIs) have been net buyers of Indian equities, investing ₹86,928 crore from the start of Samvat 2080 until late October 2024. However, October saw a reversal, with FIIs pulling out ₹88,818 crore, driven partly by attractive valuations in cheaper markets such as China and Japan. The high interest rates in developed economies and relatively high valuations in India are likely to keep FIIs cautious.
Ajay Garg, Director and CEO of SMC Global Securities, remarked, “Several factors could deter FII inflows in Samvat 2081, including high interest rates, inflationary concerns, policy uncertainties, and elevated market valuations.” This trend may persist as FIIs explore alternative markets with lower price-to-earnings ratios, increasing volatility in Indian stocks. If FII outflows continue, especially to competing markets, Indian equities could face heightened selling pressure.
2. Valuation Concerns
Indian markets have been on a record-breaking rally, but they now stand at elevated valuation levels. As of October 28, 2024, the trailing 12-month price-to-earnings (P/E) ratio of the BSE Sensex and Nifty50 was 24.1x and 23.7x, respectively. Comparatively, their historical 5-year averages were 24.1x and 23.7x, suggesting that Indian markets are more expensive than many global peers.
China’s Shanghai Composite, with a P/E ratio of 15.9x, and Hong Kong’s Hang Seng, at 11x, offer more attractive valuations. Analysts indicate that if China’s economy receives a boost from recent stimulus measures, capital flows to Indian markets could face stiff competition. As a result, high valuations may prompt profit booking, especially if corporate earnings growth doesn’t accelerate.
3. Sluggish Corporate Earnings
Corporate earnings growth in India has shown signs of deceleration. In the second quarter of FY25, net profit growth (adjusted for exceptional items) for 167 companies was only 5% year-over-year (YoY), a significant drop from the 16% YoY growth seen in the same period last year. This slowdown is raising concerns about earnings resilience, particularly in sectors exposed to global economic uncertainties and domestic cost pressures.
If this tepid earnings growth persists, it may undermine investor confidence and trigger increased selling pressure, particularly among institutional investors. The outlook for Samvat 2081 hinges on earnings improvements; otherwise, the markets may struggle to maintain their current momentum.
4. Geopolitical Tensions and Oil Prices
The geopolitical landscape remains fraught with risks, with conflicts like the Iran-Israel and Russia-Ukraine wars weighing heavily on global sentiment. Any escalation could disrupt global oil supply chains, driving up prices—a particularly concerning prospect for oil-importing economies like India. Higher oil prices would put upward pressure on inflation, complicating the policy decisions of the Reserve Bank of India (RBI).
G Chokkalingam, founder of Equinomics Research, warns, “If tensions worsen or involve additional countries, Indian markets could see increased volatility due to geopolitical stress.” This risk is compounded by the heavy dependence of India’s economy on imported oil. A sharp spike in oil prices could impact sectors across the board, from transport to consumer goods, squeezing profit margins and raising the cost of living.
More Read
5. Inflation and Monetary Policy
Inflation remains a concern, driven by both global and domestic factors. Higher oil prices, coupled with erratic vegetable prices due to an uneven monsoon, could keep inflation elevated. Persistent inflation would delay rate cuts, an outcome that could weigh on market sentiment and economic growth.
The RBI aims to keep inflation within a target of 4%, but according to Gaurang Shah, Head Investment Strategist at Geojit Financial Services, “For the RBI to consider cutting rates, inflation must stay below 4% for a sustained period.” Temporary dips in inflation are unlikely to lead to rate cuts, Shah noted. With inflation likely to remain volatile, the central bank may adopt a cautious approach, which could temper investor optimism in the near term.
Outlook for Samvat 2081
As Samvat 2081 unfolds, Indian investors should be prepared for a challenging environment. FII outflows, high valuations, slowing earnings growth, geopolitical uncertainties, and inflationary pressures all pose risks that could create volatility. While Indian equities have shown resilience and delivered strong returns, these headwinds could test the market’s endurance.
With global economic uncertainties and a possible slowdown in domestic earnings growth, a balanced approach that includes diversification and a focus on quality investments may be prudent for investors navigating Samvat 2081.
