Synopsis
The resilience of the Indian market is under threat as crude oil hovers above $100 per barrel. Geojit’s Dr VK Vijayakumar warns that a prolonged rise threatens inflation and GDP, with the window for a “painless” recovery closing. Investors are on high alert as geopolitical tensions simmer.
AgenciesPSU banking stocks have been performing well recently. What we are currently witnessing is the realization of profits in the segment. This segment can be selectively considered for investment.As crude oil breaches the $100 per barrel mark, the resilience of the Indian market faces a countdown. Dr VK Vijayakumar, chief investment strategist at Geojit, warns that while the economy can absorb a temporary shock, a prolonged two-week spike threatens to have a domino effect on inflation and GDP. As geopolitical tensions simmer, the window for a “painless” recovery is closing, leaving investors on alert.
Edited excerpts from a discussion on market outlook and opportunities:
Crude oil prices are hovering above $100 per barrel. At what point do you think the situation for Indian stocks starts to get really uncomfortable for investors?
For an oil importer like India, the impact of high oil prices can prove very negative if prices remain high for a prolonged period. A 10 percent increase in the price of crude oil (estimated at around $10) leads to an approximately 20 basis point reduction in GDP growth, a 30 basis point increase in CPI inflation, and a 30 to 40 basis point increase in the current account deficit.
This negative macroeconomic impact will manifest itself if the price of crude oil remains high for a long period of time. In the current crisis, the sustainability of the crisis is important. If the war ends soon (it could end at any time) or if there is a significant de-escalation and opening of the Strait of Hormuz, crude could immediately fall to the $80 level. In such a scenario, negative consequences will not manifest themselves. Two more weeks of crude above $100 is a temporary shock that the Indian economy can absorb. But beyond that, the economy and markets will be affected.
Do you think the market is still underestimating the side effects of the war, particularly on inflation expectations, bond yields and consumer confidence?
The market even today predicts a rapid end to the war and a cooling of oil prices. The market does not rule out a prolonged war and rising crude oil prices for long. Contrary to market expectations, if the conflict escalates and crude exceeds $120 and remains at that level for several weeks, the market will correct further from current levels. It all comes down to how long the conflict lasts and, more importantly, how long the Strait of Hormuz will remain restrictive.
How vulnerable is the fourth quarter earnings season to this context? Which sectors do you think will see the biggest impact on earnings in the fourth quarter due to high crude and freight costs?
The fourth quarter is unlikely to have a significant impact on earnings. The impact will be felt in the first quarter of FY27. However, the war and the resulting uncertainty will manifest in certain segments. Industries using petroleum inputs such as paints, adhesives and tires will be affected. Manufacturers using LNG as fuel, such as verified tiles, have been hit hard. Exporters will benefit from currency tailwinds. IT will gain; but the anthropogenic shock will continue to weigh on the segment. Exporters to the Gulf region will be slightly affected.
Expect another round of earnings downgrades in the coming weeks if oil remains high?
If the price of crude oil remains high and restrictions on gas availability persist, a new round of downward earnings revisions will become inevitable. Downward earnings revisions will be in the import-intensive and oil-related segments mentioned earlier.
Has the small-cap correction created real value, or are the segment’s pockets still frothy despite the damage?
The small-cap correction has opened up value in many segments. Overall, small-cap valuations remain high, but some segments offer attractive valuations and high growth prospects. These cut across all sectors and therefore stock selection is the key to successful investing. An ideal strategy would be to invest in small-cap mutual funds.
What do you think of banks in this setup, especially if higher inflation complicates the rate outlook?
The banking sector is today a segment benefiting from an attractive valuation. Sustained sales by REITs in major private sector banks have made the segment’s valuations attractive. This segment is a great long-term buy for investors. Credit growth in the economy continues to be good. The MPC is unlikely to raise interest rates in the near future, as inflation resulting from supply shocks cannot be combatted through rate hikes.
Help us understand why PSU bank stocks have been worst hit and whether one should be brave enough to buy the dip when growth looks promising but yields are playing spoilsport?
PSU banking stocks have been performing well recently. What we are currently witnessing is the realization of profits in the segment. This segment can be selectively considered for investment.
If the market were to rebound from here, which sectors do you think would lead the recovery?
In the event of a sharp market rebound, all struggling but fundamentally strong stocks will smartly recover. But if REITs continue to sell out the rally, large-cap banking sector names could continue to disappoint despite strong fundamentals and attractive valuations. IT appears poised for a tactical rebound in April as fourth quarter results are unlikely to disappoint. Automobiles and auto accessories are on a strong wicket. Telecommunications will remain resilient. Pharmaceuticals have upside potential.
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(What’s moving Sensex And Clever Track latest market news, stock market advice, Budget 2025, Equity market on the 2025 budget And expert adviceon AND Markets. Additionally, ETMarkets.com is now on Telegram. For the fastest news alerts on financial markets, investment strategies and stock market alerts, subscribe to our Telegram feeds .)
Subscribe to AND Bonus and read it Electronic document on economic times Online.and Sensex today.
Most trending stocks: SBI share price, Axis Bank share price, HDFC Bank share price, Infosys share price, Wipro stock price, NTPC stock price
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