Volatile Markets : Key Risks and Economic Recovery

01 Dec 2021

The Benchmark BSE Sensex and NIFTY 50 have plummeted ~8% from their all-time highs witnessed last month. The recent market volatility brings to fore some key risks namely Elevated market valuations, High oil prices, Volatile FII flows, and a Weak Global backdrop. Post this recent pullback, CISI(Citi Investment Sentiment Indicator) is in Neutral territory, implying limited returns over the next 12months.While economic recovery and the earnings trajectory is reasonable, rural sector weakness and a lack of EPS Upgrades need to be monitored closely.

Key Risks

• 1. Valuations: Valuations are at 21x fwd PE & ~70% premium to EM (both ~2sd LTA).
• 2. Volatile FII Flows: Recently India witnessed tepid FII flows with a net Inflow of US$1.6bn received in FY22 YTD ($37b in FY21) despite strong primary market activity (US$12bn+ of IPOs to-date).Domestic flows have supported the market so far however any severe drawdown could test the resilience.
• 3. Weak Global Backdrop: As per the Citi Global strategy team GDP/EPS upgrade cycle may be over( amidst fear of Fed rate hikes & QE tapering). A stronger dollar (DXY at 16-month highs) needs to be monitored.
• 4. Oil: On a YTD basis Crude is up ~60%. Near team global inventories are low and may move lower; this may improve beyond 1Q22.
• 5. High Primary Market Activity: The heightened market activity is good for the markets and India’s weightage in indices in the medium term. Should the flows become muted – it may cause volatility.

Improved Metrics

• 1. Recovery Trajectory: a) Broad recovery index (up 2.6% in Oct) confirmed recovery picked up pace during festive season b) Sequential growth is waning in rural consumption & economic activity.
• 2. Earnings: Reported earnings was largely a beat with 2Q BSE100 EBITDA largely in line (slightly below at 22%yoy).Earnings revisions are neutralish implying that street expects ~40% and 18% EPS growth in FY22E/23E ( for now ).
Source: Company Reports, Citi Research Estimates

Summary: Citi analysts maintain their view of a limited upside over the next 12m with Dec'22 NIFTY target of 17,500.Domestic flows remain key for near term direction.

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