Benchmark equity indices soared nearly 2 per cent in Friday’s trade, taking cues from global markets. The 30-share BSE Sensex rose 1,081 points, or 1.89 per cent, higher at 58,317 while the 50-share NSE Nifty index was up 301 points at 17,316.
Analysts are largely optimistic about domestic stocks, but believe rising crude oil prices, extension of the US Fed rate hike cycle, escalation in the Ukraine-Russia war and a recession in the developed markets pose risk to the market.
Alok Agarwal, Portfolio Manager, Alchemy Capital Management believes it would not be surprising to see a handsome double-digit return for domestic indices by the next Diwali. But he felt that crude oil prices are a key risk.
On Friday, Brent crude oil prices inched higher after OPEC+ announced a production cut of 2 million barrels per day from November. After falling nearly 9 per cent in September, Brent has jumped 7.5 per cent on a month-to-date basis till October 13.
Agarwal thinks that strong US labour market — September US unemployment level dipped to 3.5 per cent from last month’s reading of 3.7 per cent, and elevated inflation readings are supporting the US Fed’s hawkish commentary. This could extent US rate hike cycle till March 2023 to 150 basis points from the earlier market estimate of 125 basis points.
“The higher rate hike expectation by US Fed has resulted in the firming up of US bond yields,” Agarwal said.
Historically, when bond yield rise, foreign portfolio inflows shift from domestic equities to safe havens such as US bonds. A spike in US bond yields weakens the rupee against dollar, which hurts the bottom line of companies that have borrowed in the US dollar denominations.
For Vikas V Gupta, CEO and Chief Investment Strategist, Omniscience Capital, the biggest risks for India are uncontrollable US inflation and chances of interest rate hikes continuing.
“Also, the China-Taiwan conflict, the US-China cold war and the Russia-Ukraine war going out of control and escalating to a Europe-wide war are possible risks. A potential financial crisis in the EU-UK cannot be ruled out either,” Gupta added.
To Deepak Shenoy, Founder at Capitalmind, an escalation of the Ukraine-Russia war and a deep recession in the West will be the biggest risk, which may threaten liquidity.
