January 2025
2025 is going to be a year of shocks on the geopolitical front. While we’ve witnessed enough bombing and bloodshed in the last year, seems like political ego and motifs can be far more irrational than greedy investors of securities markets.
Heightened Geopolitical Risks
The escalation of tension in the Middle East in the New Year has heightened the uncertainty over oil prices. To add to India’s woes, the recently announced new US sanctions on cheap Russian oil is going to further stretch India’s import bills driving imported inflation up. If the oil price crisis was not enough, the world now has to also sit up tight to keep an eye on China’s claim for reunification of Taiwan that is going to be far from peaceful.
Rising US Bond Yields
The escalating geopolitical tension is driving US Treasury bond yields up north as investors look up to it as safe heaven. A higher US yield means money flowing from emerging markets including India to the US. Also, the US Fed has been slow in cutting rates due to high inflationary pressure. The US job growth accelerated in Dec 2024 while unemployment rate fell to 4.1%. A firm labour market is further going to delay any probable rate cut by the Fed in the near term.
Dollar Delight
Higher US yield implies the demand for dollar denominated investments will further help the USD strengthen its position in the global economy. No wonder, the INR has been on a downward spiral since November 2024, going past 86.5/$ at times. A depreciating INR doesn’t bode well for the Indian market.
Chinese Whispers
In September 2024, China announced a series of economic stimulus measures to bring it’s economy back on tracks which has been struggling since the pandemic days. These measures, primarily targeted at China’s monetary policy, included lowering existing mortgage rates for home owners, lowering interest rates to make borrowing cheaper. China has been unable to spur private consumption since COVID-19 and these measures were aimed at reviving retail consumption.
The announcement of such measures obviously led to a market rally with the Shanghai Composite surging 4.4% and the blue-chip CSI300 index surging 3% respectively in September 2024. The sudden outperformance of Chinese stocks resulted in heavy sell-off by FPIs (Foreign Portfolio Investors) bringing down the Indian stock indices by nearly 1.5% on 30 September 2024. The FPI selling pressure continued through October as it was an opportune time to book profits in India and divert the money to Chinese stocks.
Does the rise of Chinese stocks pose a threat to Indian equities? Not at the moment because the Chinese rally couldn’t be sustained for long. China needs to do much more to revive domestic consumption and its property sector than the current monetary and fiscal stimulus measures.
The Last Word
Rising oil prices will not just create a spillover effect but will have a wider ramification across all sectors of the Indian economy. The depreciating INR will adversely affect sectors like export while boosting revenue numbers for dollar earning sectors like IT. What should be your approach to stock and sector selection with the global headwinds likely to get stronger? Will President Trump be able to stabilise the geopolitical risk factors lurking around?