Assessing Risks: Global economic uncertainty, Budget and more - a look at potential threats to market rally in H2

The Indian market has sustained a bullish momentum, marked by consecutive record-breaking rallies. Recently, the benchmark index Sensex surpassed the significant milestone of 80,000 points, underscoring robust investor optimism. Similarly, the Nifty index achieved its own milestone by crossing the 24,000 level just a week earlier. These achievements highlight the strong upward trajectory and positive sentiment driving the Indian stock market.

The recent surge in the Indian stock market can be attributed to heightened investor confidence following the re-election of the Modi-led NDA government for a third consecutive term. This political stability has bolstered optimism among investors, signaling continuity in policy direction and economic reforms. Additionally, the resurgence of foreign investor inflows into India, coupled with favorable macroeconomic indicators and improving global economic conditions, has further fueled positive sentiment in the market. These factors collectively underpin the recent rise in investor confidence and the buoyancy observed in Indian equities.

Looking forward, market experts anticipate that this bullish momentum will persist throughout the remainder of the year. Attention is now turning towards the upcoming Budget and the release of June quarter earnings, which are expected to guide market trends and investor sentiment in the coming months.

The recent surge in India's stock market has been buoyed by a combination of factors including strong retail investor participation, optimistic growth outlooks for Indian corporations, and favorable equity taxation policies. However, beneath the surface of this bullish momentum lie several potential risks that could undermine market stability and investor confidence.

Let's take a look at these looming risks that could derail the rally in the second half of FY24.

Global Economic Uncertainty

Apurva Sheth from SAMCO Securities noted that global economic uncertainties, such as the US Federal Reserve's stance on interest rates amid slowing GDP growth, pose risks of reduced global economic growth, impacting Indian financial markets.

"US Fed has been adamant in holding interest rates as long as it doesn’t see inflation cooling off below 2 percent. There is a risk of high interest rates stalling the world economic growth engine. The US GDP slowed down and recorded a GDP growth rate of only 1.3 percent in the quarter ending on Mar-24. If the growth slows further and the US runs into a recession then that wouldn’t be good for global as well as Indian financial markets," Sheth said.

Sumit Jain, Deputy CIO, ASK Investment Managers, stated that any unforeseen event globally leading to a contraction in global risk appetite can have an impact on Indian markets.

Macroeconomic Factors

Sonam Srivastava, Founder and Fund Manager at Wright Research, underscores geopolitical conflicts, political uncertainties, delay in rate cuts, and inflation as potential that could affect the market sentiment.

"A delay in the expected normalization of interest rates by the RBI could lead to a resurgence of inflation, potentially forcing a sharper rate hike later, unsettling markets. Additionally, a global recession triggered by factors like geopolitical conflicts or trade disruptions would have a negative impact on the Indian economy and its capital markets. Political instability within the Indian government, particularly in the case of a fragile coalition, could introduce policy uncertainties and deter investor confidence. Furthermore, a weaker monsoon season, crucial for India's agricultural sector, could dampen economic growth and corporate earnings. These combined risks – delayed rate cuts, a global slowdown, political instability, a weak monsoon, and persistent inflation – highlight the importance of careful risk management for investors navigating the Indian market in the second half of FY24," She said.

Jain of ASK Investment Managers also pointed out that while the predictions by IMD are for La Nina conditions, a weak monsoon, in case, can have an impact on rural income and consumer spending. This can have an impact on inflation and correspondingly delay rate cuts. Also, while the expectation is of continued strong earnings growth by India Inc., any disappointments here can lead to an impact on value creation.

Political Risks and Upcoming Budget

Hemang Kapasi, Head of Equities, Sanctum Wealth, believes the biggest risk for now is political, given the lukewarm win for the incumbent government. If the impending state elections in Haryana and Maharashtra go against the ruling dispensation at the centre, there could be a move towards populism, taking allocation away from investments. Any adverse announcement in the upcoming Budget, especially on the capital gains tax, can also do its bit to derail the rally.

Ravi Singh- SVP, Retail Research, Religare Broking, noted that the biggest risk to a bull market is tension and instability in politics, both around the world and at home. International conflicts or trade disputes can mess up global supply chains, cause market swings, and make investors nervous. At home, political instability can lead to uncertain policies, affecting how businesses feel and their decisions to invest.

Trivesh D, COO at Tradejini, also said that policy shifts following recent political changes could introduce uncertainties impacting specific sectors.

Regulatory Actions and Expensive Valuations

Sheth of SAMCO Securities highlighted that Indian markets run the risk of moving way above their fundamentals. Sheth noted that Indian markets appear overpriced, particularly in the mid-cap and small-cap segment, compared to other emerging markets like China, Brazil, the Philippines, etc.

Kapasi of Sanctum Wealth warned of regulatory interventions targeting market froth, particularly in small-and-midcaps, which could lead to volatility and capital outflows. The memory of past regulatory actions in 2018 impacting these sectors serves as a cautionary tale for investors.

Trivesh D of Tradejini also pointed out that despite recent gains, Indian markets face potential risks that could disrupt the current rally. Concerns over the financial health of SMEs, historically prone to corrections after rapid growth unsupported by fundamentals, loom large. The small-cap Nifty's current high P/E ratio of 29 underscores vulnerability. Additionally, policy shifts following recent political changes could introduce uncertainties impacting specific sectors.

While the Indian stock market continues to ride high on optimism, stakeholders must remain vigilant amidst the array of potential risks. From valuation concerns and global economic headwinds to geopolitical tensions and regulatory interventions, the landscape demands prudent risk management strategies. Investors are advised to maintain diversified portfolios, stay informed about market dynamics, and adjust strategies to navigate potential disruptions effectively in the upcoming months of FY24. By doing so, they can mitigate risks and capitalise on opportunities in a volatile but promising market environment.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.