Markets are not fully pricing in headwinds; can fall more: Analysts

If the oil prices rise up to $105 - $110 per barrel, a 10 per cent fall in the Sensex and Nifty is possible, say analysts

Indian equity markets are not fully pricing headwinds in the form of rising oil prices and its impact on inflation, possible hike in rates by the global central banks, including the US Federal Reserve (US Fed) and the Reserve Bank of India (RBI) at the current levels. This, they believe, will continue to keep them choppy and can even see the S&P BSE Sensex and the Nifty50 dip around 5 per cent from the current levels.

"Possible rate hikes in the US and stemming the flow of 'easy money' into equities, monetary policy review by the RBI, geopolitical developments related to Ukraine that are nearing a flash point and the rising crude oil prices that are certainly bad news for India are creating nervousness in the markets. An actual clash on the Russian border is not priced in at all. While the markets know about the impending hike by the US central bank, the actual hike when it comes can also see markets take a hit. The Nifty has support at 17,000 levels; a breach on the downside can see it slip 3 – 5 per cent," explains U R Bhat, co-founder & director at Alphaniti Fintech.

G Chokkalingam, founder and chief investment officer at Equinomics Research agrees and says that the markets have not fully priced in the risks, especially related to rising oil pricess.

"If the oil prices rise up to $105 – $110 per barrel, a 10 per cent fall in the Sensex and Nifty is possible. Though the fall from the recent high has captured some of the headwinds, they’re not yet fully priced in," he said.

Simmering tensions between Russia and NATO over Ukraine has seen Brent oil prices hit a seven-year high and go past the $93 per barrel mark – up 16 per cent in a month. A full-scale war, analysts said, can take them past the $100 per barrel mark. Most analysts, including those at Rabobank International and BofA Securities see Brent hitting the $125 mark by June 2022.

"The 19 OPEC+ countries with quotas underperformed their production targets by 832,000 barrels per day (bpd) in December. If this trend persists, the oil market is likely to swiftly move into deficit and push oil prices even higher, at a time of soaring inflation. Capacity constraints will become more limiting by May, when 96 per cent of the world's remaining 1.8 million b/d of spare capacity will reside in Saudi Arabia and the UAE," said Paul Sheldon, Platts Analytics' chief geopolitical adviser.

On their part, the markets have taken note of these developments, with the benchmark indices – the S&P BSE Sensex and the Nifty50 – slipping around 3 per cent each in the past one month. The Nifty Energy index that comprises upstream players like Reliance Industries (RIL) and ONGC, in this backdrop of rising oil prices, has outperformed with a rise of nearly 6 per cent during this period.

"Rising crude prices, global inflation, geopolitical uncertainty, supply chain disruptions and hawkish stance of Federal Reserve can increase inflation and pressurize currency even as the government is targeting growth by playing on the front foot. We believe 2022 will be a stock pickers market and easy money making is over," cautioned analysts at Prabhudas Lilladher in a recent coauthored report.