The current week brought a new wave of challenges stemming from both international and domestic political conflicts. The Russia-Ukraine conflict intensified after U.S. Democrats approved the use of American arms against Russian territory, potentially in response to Moscow’s decision to deploy North Korean soldiers to the Ukrainian frontlines. This move appears to be a last-ditch effort ahead of the planned White House transition in January 2025. The heightened geopolitical tensions, compounded by nuclear threats from President Putin, triggered instability in global markets, including India’s, which was already underperforming. However, the markets regained stability as the situation de-escalated, with no further escalation of the conflict.
The domestic political landscape also faced turmoil during the Maharashtra and Jharkhand assembly elections. Historically, state election volatility has had little impact on the medium to long-term trends of the Indian stock market. However, this time, the intensifying rivalry between the BJP and Congress brought the Adani bribery case to the forefront, reported by the U.S. Department of Justice. This added to the market’s woes as there was some sign of slowdown in FII selling, which surged again this week. Along with the Adani group, stocks of financials & industrial sectors were also affected.
The market showed resilience by the end of the week, signalling that domestic political turmoil is unlikely to have a significant long-term impact on the Indian stock market. However, high exposure of foreign investors in the Adani Group and exposure of PSU financials and banks on the project will have to bear the brunt, before judicial & project feasibility clarity emerge. The legal case in the U.S. is expected to restrict the Adani Group’s access to international funding, evidenced by Adani Green’s cancellation of a $600 million bond issuance—the second such withdrawal in the last two years. Mockery the strength of the trial depends on the bribery taken in the BJP opposition states. Domestic politics dogfight will be held on the international judiciary. Adani Group was able to recover most of the lost ground done by the Hindenburg report in Jan 2023. However, this time it will be a challenge, as the DoJ has accused after an investigation of 2yrs.
The consolidation continued in the market during the week due to weak Q2 results, FII selling, news of reduction in the probability of a FED rate cut in December, and a weak rupee. However, a strong bounce happened by the end of the week due to bottom fishing by domestic investing, including retail. The domestic market was on a sell-off mode in the last 2months, taking it to the oversold territory. The correction in valuation suggests a potential pause in further price erosion, as trading at a 5yr average. However, the pace of recovery will depend on a pick-up in earnings, which is expected to improve due to an anticipated rise in central and state government spending in H2, fuelled by the festival and marriage seasons. Indications are that economic data is likely to improve on a MoM and QoQ basis. Monthly data due to be released by the mid-December could offer fresh insights into the economic outlook. Initial analysis suggests that corporate growth in H2 will be 10 to 12% compared to 6% in H1FY25. Whether it is good enough and to sustain the trend and valuation will depend on that narrative on FY26 earnings outlook.
