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For net oil importer India, elevated crude oil prices are seen wreaking havoc on its macro-economy. Although India's direct exposure to Russia and Ukraine in terms of trade is not large, as anticipated, there's an oil shock as the conflict is pushing this crucial commodity's prices higher.
With Brent continuing to hover above the $120 a barrel mark, it is feared India will bear the brunt in the form of a spike in retail inflation and a widening current account deficit. What's more, with the Indian rupee hitting a new low, the pressure on imports is likely to get accentuated.
Needless to say, these factors are making investors jittery.
Little wonder that foreign research house Credit Suisse has downgraded India to underweight rating from overweight. "Higher oil prices hurt the current account, add to inflationary pressures and increase sensitivity to Fed rate hikes," it said in a report.
With India in pain, better-placed emerging market peers are poised to gain. "We use the funds freed from India to raise China from Market Weight to Overweight," added the Credit Suisse report. According to the foreign research house, although China's credit intensity still clouds long-term prospects, its low oil import bill, insulation from Fed rate hikes and improving macro indicators are some positives that they like.
EPFR-tracked Emerging Markets Equity Funds posted their 11th consecutive inflow during the week ended 2 March as investors kept faith with fund groups dedicated to the Greater China – China, Taiwan and Hong Kong – universe, fund-flow tracker EPFR Global said in its weekly report on 4 March.
On the other hand, BRIC (Brazil, Russia, India and China) Equity Funds saw their second straight week of heavy redemptions, posting their largest outflow since mid-4Q20, added the EPFR report.
Indian companies which are dependent on crude-based raw materials are now exposed to greater risk of gross margin compression. Even if they raise prices to protect margins, subdued demand means lower volume growth. Despite the risk of an earnings downgrade, Indian stocks are not cheap. That could also be one factor why investors may be ditching Indian equities for cheaper options.
"The recent sharp market downtrend notwithstanding; at 18 times price-to-earnings/2.8 times price-to-book, the Nifty valuations are still at a premium to its long term average," analysts at Jefferies India Pvt. Ltd said in a report on 8 March.
The report added, on a peer relative basis, the Indian market continues to trade around 15% premiums versus historical despite recent underperformance against ASEAN (Association of South East Asian nations), etc.
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