Emkay Global, in its latest strategy note, has issued a caution regarding the Indian stock market, highlighting significant downside risks. This assessment comes amidst ongoing geopolitical tensions in the Gulf region and the closure of the Strait of Hormuz (SoH), which has kept Brent crude prices elevated at $105-110 per barrel.
The brokerage points to the prolonged pressure on India’s current account deficit (CAD) and sustained selling by foreign portfolio investors (FPIs) as key factors weighing on domestic markets. These macroeconomic concerns are contributing to increased market volatility.
Opportunities Emerge Amidst Weakness
Despite the warnings of downside risk, Emkay Global anticipates a return to normalcy in the coming weeks. The firm advises investors to view any market weakness as a strategic entry opportunity. They have identified discretionary and industrial sectors as key overweights for investment.
Previously, Emkay had projected the Nifty index could fall to 21,000, representing a 12.4 percent dip below its long-term average on a price-to-earnings basis, should the energy crisis persist.
Impact of Heatwave and Fuel Prices
India has experienced a severe heatwave this summer, with average temperatures 1.6-5°C above long-term averages across large parts of north, central, and eastern India. This extreme weather negatively impacts the agricultural sector, affecting crops, soil moisture, and reservoir buffers.
Beyond agriculture, the heatwave is expected to slow infrastructure project execution and could dampen consumption in certain categories due to reduced mobility. However, Emkay believes the long-term impact on the agri-economy will be muted, citing strong buffers and active price management that have improved resilience against such shocks over the past decade.
In related news, petrol and diesel prices have been hiked by Rs 3 per litre. Emkay anticipates further hikes due to persistent under-recoveries by oil marketing companies, estimated at Rs 17-18 per litre.
Sectoral Outlook: Winners and Losers
Emkay Global identifies several sectors that stand to benefit from the prevailing conditions, including weather disruptions:
- Consumer Durables and Beverages: Expected to see stronger cooling demand and higher cold beverage consumption due to the heatwave.
- Power, Utilities, and Transmission: Likely to benefit from peak power demand and improved plant load factors (PLFs). Key stocks mentioned include Blue Star and Varun Beverages.
Conversely, some sectors may face headwinds:
- Infrastructure, Cement, and QSR (Quick Service Restaurants): Could be negatively impacted by slower outdoor construction activity and weaker daytime footfalls. Key impacted names include Ambuja Cements and Devyani International.
Emkay is not currently building pessimistic scenarios for rural sectors or stocks, noting the dwindling impact of El Nino on the agri economy over the past decade.