India returns to the center of investors’ attention, while this morning the stock markets of South Korea and Japan suffer heavy sell-offs. Foreign traders bought a net $1.6 billion in Indian shares, the largest daily amount in nearly six years, according to provisional stock market data.
The contrast highlights two factors that are changing market valuations: the drop in oil prices and doubts about the returns on huge investments in artificial intelligence. For India they may represent support, but it is still early to talk about a lasting shift of capital.
Why investors are returning to the Indian stock market
India moves against the trend of the most affected Asian markets: the Nifty 50 gains 0.51% and the Sensex 0.76%. These are trading readings, not closing results.
The explanation starts from an often overlooked difference: investing in Asia does not mean exposing yourself to economies that are all the same. A market where semiconductor producers have an impact reacts differently from one where banks, consumption and services matter more.
As investors revise technology earnings expectations, they may reduce those positions and revalue other markets. It is the so-called rotation of capital: the sectors and countries to which more weight is assigned change.
This does not prove that every dollar that comes into India comes from the sale of a technology stock. The data on purchases indicate the balance of foreign operations, they do not allow us to reconstruct the entire path of the money on our own.
Oil links American politics to investments
The other decisive element is energy. India is a major oil importer: when crude oil costs less, an important part of its foreign spending is reduced.
Cheaper oil can reduce transportation and manufacturing costs, ease pricing pressures and improve the outlook for corporate margins. These benefits, however, do not reach all companies at the same time or to the same extent.
| What changes | Possible effect | What is not automatic |
|---|---|---|
| Oil drops | Lower energy costs for importers | An immediate drop in consumer prices |
| Foreign purchases are back | Higher demand for Indian stocks | A lasting rise in the stock market |
| The rupee strengthens | The return on foreign investments varies | An equivalent gain for those who invest in euros |
Oil and profits: the signal to read also in Piazza Affari
The return of capital to India also brings a question to Europe’s attention: which companies can improve their accounts if energy costs less? For those who follow Piazza Affari, the connection passes through company financial statements.
Airlines, transporters and energy-intensive industries can benefit from cost reductions. For oil producers, however, lower prices can compress revenues. The effect also depends on supply contracts, price hedges and the ability of companies to maintain their margins.
This helps to read a stock market session beyond the trend of the general index. A market can go down, while the prospects of some companies improve; a company can sell more and earn less if costs increase. It is the relationship between revenues, expenses and earnings expectations that makes the comparison with India interesting.
The return of investors to the Indian market therefore does not anticipate a rise in Milan. However, it offers a key to interpreting the next quarterly reports: understanding where the drop in energy translates into greater profits and where, instead, it is absorbed by lower sales prices or weak demand.
The rupee can change the yield in euro
For those investing from Italy, the performance of the shares is only part of the result. If the investment involves unhedged Indian currency exposure, the exchange rate also matters.
A rally in stocks can be tempered by a weakening of the rupee against the euro; a strengthening of the currency can, however, contribute positively. It is a component of market risk that deserves attention as much as the performance of the index.
Furthermore, a stronger rupee against the dollar is not necessarily stronger to the same extent against the euro. The two comparisons are not interchangeable.
For India the proof comes from the next budgets
Foreign purchases mark a return of interest, but its duration will also depend on the companies. Cheaper oil will have to translate into lower costs; consumption and demand will have to support revenues. The next financial statements will show how these expectations are reflected in the accounts.
This is the step that also matters for those who follow European stock markets: when the climate on the markets changes, valuations change rapidly; profits take longer. India has regained the attention of international capital. Now his companies must give investors reasons to stay.s
