Beware! These six headwinds may spoil the current Indian stock market rally

Indian stock market: After a massive correction in the last one month, Indian benchmark indices showed signs of a rebound. Both Sensex and Nifty 50 extended gains to the second straight session on Monday, November 25 on the back of the BJP-led NDA's landslide victory in the state elections in Maharashtra. 

In intra-day deals, Sensex climbed 1,356 points or 1.7 per cent to its day's high of 80,473.08 while the Nifty advanced over 444 points or 1.8 per cent to a high of 24,351.55. This comes after an almost 2.5 per cent rally on Friday, November 22.

This latest surge has also turned the Nifty positive for November, up 0.3 per cent. Till November 21, Nifty was down shed 3.5 per cent in the month. In October, the index crashed over 6 per cent. Overall in 2024 so far, the index is still up 12 per cent but is over 7 per cent away from its peak of 26,277.35, hit in September.

Even though Nifty 50 posted strong gains recently, concluding that the worst is over may be premature. The domestic market remains weighed down by weak earnings, elevated valuations, and a lack of fresh catalysts. Whether the rally will continue beyond a couple of days remains to be seen since multiple headwinds will continue to constrain the bulls.

Let's take a look at 6 concerns that can restrict this ongoing rally:

1. Russia-Ukraine war

President Vladimir Putin confirmed that Russia would continue testing its Oreshnik hypersonic missile in combat scenarios, with a stock ready for deployment. Recently used in an attack on Ukraine, the missile's deployment marks a significant escalation, which Russia attributes to Ukraine's use of Western-supplied weapons, such as U.S. ballistic and British cruise missiles.

Putin stated, “We (Russia) will continue these tests...depending on the situation and the nature of the security threats,” emphasising that a stock of these systems is prepared. Moscow framed the missile's use as a warning to the West, accusing the US and allies of escalating tensions. This escalation could push investors toward safe-haven assets, potentially triggering a market sell-off.

2. FPI selling

Foreign portfolio investors (FPIs) have been selling Indian equities since October, with data from National Securities Depository Ltd (NSDL) showing an outflow of ₹94,017 crore that month. So far in November, FPIs have offloaded Indian equities worth ₹25,533 crore.

This sell-off is attributed to concerns over high valuations, a Q2 earnings slowdown, and weaker high-frequency indicators. Meanwhile, China's recent stimulus measures are drawing overseas investors, who hope these initiatives will help revive Beijing's economy post-pandemic. Reports suggest that FPIs are reallocating funds from Indian equities to Chinese markets, citing a lack of near-term catalysts to sustain India’s elevated stock valuations.

3. Inflation concern on soaring oil prices

Oil prices remained near two-week highs on Monday after a 6 per cent surge last week, fueled by escalating geopolitical tensions, which raised concerns about potential supply disruptions. Brent crude futures edged up 13 cents (0.2 per cent) to $75.30 a barrel, while U.S. West Texas Intermediate (WTI) crude futures rose 14 cents (0.2 per cent) to $71.38 a barrel today. Both benchmarks posted their largest weekly gains since late September, reaching their highest settlement levels since November 7, following Russia's hypersonic missile strike on Ukraine, which was framed as a warning to the U.S. and UK.

The rise in crude prices poses challenges for India, which imports 85 per cent of its oil needs. Higher oil prices could elevate inflation, potentially delaying the Reserve Bank of India's (RBI) anticipated rate cuts, a key focus for markets.

4. Strengthening US dollar

Donald Trump's victory in the U.S. election has bolstered the dollar index, which has risen nearly 2 per cent this month. Expectations of a second Trump presidency, along with a potential Republican sweep of Congress, have sparked optimism for deregulation and tax cuts. These measures are seen as potential drivers of economic growth and inflation, raising concerns that they could limit the Federal Reserve's ability to further reduce rates, thereby supporting the dollar's rally.

In his 2024 presidential campaign, Trump proposed cutting the corporate tax rate for U.S.-based manufacturing from 21% to 15%, alongside new tariffs, including a 10% tariff on all imports and a 60% tariff on Chinese goods. If trade tensions with China intensify, it could further strengthen the dollar as investors seek safety in the U.S. amid growing uncertainty.

5. Economic uncertainty after Trump's victory

Motilal Oswal Private Wealth (MOPW) highlights that Trump’s "America First" policy could reshape global trade by reducing imports, especially from China, to support U.S. manufacturing. However, increased tariffs might lead to retaliatory measures, affecting U.S. exports in agriculture and technology.

The EU may impose tariffs on U.S. goods, impacting automotive and steel industries, which could slow European growth. Emerging markets may face higher export costs due to a stronger dollar and tariffs, particularly in IT and pharmaceuticals, while countries like Mexico could benefit from shifting manufacturing away from China.

Trump’s policies could escalate tensions with China and alter international alliances, with the EU aiming for greater self-reliance. For India, U.S. tax cuts could boost IT spending, benefiting Indian IT companies, but a stronger dollar and tariffs may hurt exports. India may strengthen its role in global supply chains, especially in sectors like AI and semiconductors.

6. Earnings downgrades

In a recent GREED & fear note, Christopher Wood of Jefferies highlighted that disappointing results from India Inc. in the July-September quarter led to the steepest earnings downgrades since early 2020. Jefferies revised its FY25 earnings estimates for 63 per cent of the 121 companies under its coverage that recently reported quarterly results. The brokerage now projects a modest 10 per cent earnings growth for Nifty 50 companies in FY25, reflecting cautious sentiment regarding the near-term economic outlook.

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.