Will Indian markets buck the trend amid geo-political risks?

While the debate about decoupling continues, it is crucial to pay attention to the significant changes in the global risk landscape, which warrant investor attention in the equity market.
Have Indian equity markets decoupled? While the global equity markets have faced challenges, with declines of average 2.37% in last six months as against Nifty Fifty returns of 11.5%, India has managed to buck the trend and gain ground. The resilience and strength displayed by the Indian equity markets have led some to believe that they have decoupled from global trends.
This is despite heavy selling by Foreign Institutional Investors (FIIs), who have sold close to Rs 11,000 crore in October 2023 (till 17th October). Over the past three months, FIIs have been net sellers of Rs 58,256 crore. However, thanks to strong domestic liquidity and buoyant sentiments, most of the FIIs’ selling has been absorbed by domestic buyers. Domestic institutional investors (DIIs) have bought close to Rs 55,000 crore during this period, providing support to the markets. Despite some mutual funds halting fresh investments due to reasons like lack of fresh ideas and high valuations, Systematic Investment Plans (SIPs) alone are contributing close to Rs 16,000 crore of monthly inflows.
Geopolitical Risks Increase
Geopolitical risks have increased in recent days, with the world already coping with the impact of the Russia-Ukraine war and now the Israel-Hamas conflict, which has raised the probability of escalation on both sides. Iran, a major oil exporter, is considered to be backing Hamas.
An extended and large-scale war would have devastating economic consequences for the world, including disruption of global supplies, impact on manufacturing and trade, higher oil prices, and higher inflation. India and other countries that rely heavily on imports would be particularly vulnerable.
A possible disruption in the oil market and global supply has already sent crude oil prices towards the $100 mark, which could jeopardize global growth. India’s corporate earnings are particularly sensitive to oil prices, so higher oil prices could lead to erosion in margins and lower earnings expectations for the fiscal year 2024, impacting India’s valuations.
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