The high-flying Indian stock market has lost its way in the last five weeks, and risks further falls as the Indian economy suffers the fallout from the Russian invasion of Ukraine.
India, which reports GDP figures for the December quarter later today, will be hit harder than any other nation in Asia as oil prices rise. It is the world's third-largest oil importer, behind China and the United States, shipping in 86% of the oil that it needs.
Every 10% increase in the cost of oil hurts the Indian economy to the tune of -0.20 basis points, the Nomura economists Sonal Varma and Aurodeep Nandi calculate. That is by far and away the most-severe impact in Asia, where most nations import oil, and will see their economies suffer.
Oil prices leaped 4.3% in early European trading hours on Monday, taking the Brent crude quote back above US$100 to US$103.36 per barrel. That means oil is 14.9% higher than at the start of February.
India's GDP likely grew 6.0% in the December quarter, according to a poll of 38 economists by Reuters, who generally downgraded prior forecasts. That's a pace slowing from 8.4% growth in the quarter before. Manufacturing and investment were already stalling, and the figures will not reflect any of the oil-and-trade induced disruptions caused by the war in Ukraine.
A 10% hike in the oil price also causes a 0.40 percentage point increase in Indian inflation, the economists say. That is level with the Philippines, another major importer of both energy and food, for the biggest impact in Asia.
Indian equities had been the star performers among Asian markets during the pandemic. The benchmark Sensex did plunge 33.0% in early 2020 at the onset of the Covid-19 crisis. But Indian stocks regrouped over the rest of the year, and had reclaimed all lost ground by November 2020. When they peaked in October, the Sensex was 50.0% higher than when the entire pandemic began.
The Sensex retested its all-time highs from October once again in January. But each summit has fed into a selloff, with the Sensex now down 8.8% in the last five weeks. There's little cause for optimism as the impact of the Ukraine conflict feeds through.
Indian stocks opened 1.4% lower today as investors factored in the intensified sanctions placed on Russia over the weekend. But they fought back into the black and closed up 0.7% on a day that all Asian indexes except for Hong Kong have moved higher.
The central Reserve Bank of India may pivot to a hawkish stance by the middle of the year, in response to inflation fears. Nomura forecasts a 100 basis point increase in the policy repo rate, with interest-rate increases starting in June.
We don't yet know which Russian financial institutions will be cut off from international transfers. European Commission President Ursula von der Leyen says only that "a certain number of Russian banks" will be removed from the SWIFT international-transaction system, while the Russian central bank is having its assets frozen.
Germany had been a holdout on penalizing Russia by denying banks access to SWIFT. But on Saturday, German foreign minister Annalena Baerbock said the country was working on "targeted and functional restriction" to SWIFT, with von der Leyen and a Western coalition announcing their measures soon afterward.
The oil giant Rusal (HK:0486), which has its shares listed in Hong Kong, saw them fall 16.5% today. That takes their cumulative loss since February 17 to 39.2%.
The Hong Kong stock market has suffered the heaviest selling since the Ukraine crisis came to a head, down 8.4% since February 17, the week before Russian troops moved into Ukraine. The city-state is already contending with an escalating Covid crisis that threatens to get out of control, with record new infections set and reset.
Hong Kong stocks have historically dropped sharply in reaction to military conflicts such as the Gulf War, the Iraq war, and Russia's annexation of the Crimea. But, CCB International's analysts note, the Hang Seng has then rebounded between 3% and 11% in the following quarter after the onset of fighting. The CCB team believe there's a bottom for the Hang Seng at 22,000, and it's not far off that, closing Monday down 0.2% at 22,713, on a day most Asian markets rallied.
That theory will be sorely put to the test given the latest outbreak of Covid in the city. Having kept cases to a minimum through isolation and one of the world's most-punishing quarantines, Hong Kong is now seeing Omicron sweep through the city. It is responding by requiring residents to test three times for Covid in March. The store shelves are emptied out as Hong Kongers anticipate a potential lockdown of the city, which has so far avoided such extremes.
Before the current wave, Hong Kong had recorded a cumulative total of 12,000 Covid cases. Having set a new record of 26,026 cases and 83 deaths on Sunday, it looks set to report more than 34,000 cases today, with health minister Sophia Chan hinting that a China-style full lockdown of the city is in the offing. Sunday's addition means there have been 117,056 positive cases in the last 14 days.
India and Hong Kong would therefore be markets for Asia-focused investors to avoid at least until there's greater clarity on the multiple disruptions stemming from the Russian invasion of Ukraine. Higher oil, financial-system disruption and trade dislocation compound the high human cost of the conflict.
"Geopolitical risks are always a wildcard in investing, and are nearly impossible to forecast," Nuveen, the investment arm of the teachers' retirement fund TIAA, says. "We don't think this is a time to overreact or adjust plans."
That means institutional investors should focus on long-term policy objectives, Nuveen says, individual investors should stay committed to their growth and income objectives from their portfolio. However, elevated energy prices mean some asset classes get oversold, presenting "tactical opportunities," the asset manager says. "However, due to market volatility in recent weeks, the optimal entry points may well have passed."
