Why could rising oil prices drive more foreign funds out of India?

With Brent crude crossing $110 a barrel, the outlook clouded for two of Asia’s biggest oil importers – which is also home to the region’s worst-performing currencies this year. While stocks in Mumbai and Seoul have already taken a hit from concerns over a Federal Reserve hike in interest rates and related technology sell-offs, analysts view both as susceptible to risk-off sentiment.

Rising costs could weigh down companies’ profits at a time when Asia’s earnings growth is lagging behind global peers. Higher oil prices are “particularly negative for India, Korea and Taiwan, which are big oil importers,” Morgan Stanley strategists including Jonathan Garner wrote in a note.

Down more than 9%, South Korea’s Kospi index is the worst performer among major Asian benchmarks this year. India’s S&P BSE Sensex is down 5% while the broader MSCI Asia Pacific index is down nearly 6%.

Bloomberg Intelligence estimates that if commodity prices remain high, there is a risk of an increase of 80-100 basis points to the 5.9% average inflation forecast for India in the year beginning April. The governor of the Bank of Korea warned last week that the war could further exacerbate inflation, which is forecast to remain above 3%.

Foreign funds are net sellers of Indian and Korean stocks this year and Nomura Holdings Inc. Russia sees room for further deterioration after its invasion of Ukraine. So far 2022 has seen an outflow of $9.3 billion in Indian equities, the highest among emerging Asia markets tracked by Bloomberg excluding China. South Korean shares have pulled out $2.9 billion.

Nomura strategists, led by Chetan Seth, wrote, “While overseas ownership of markets such as India, Korea declined amid recent selloffs, valuation-driven gains in these markets led to foreign equity still trading at pre-Covid levels.” It’s too big.” A report Monday.

According to the Nomura report, foreign holdings of shares in South Korea and India stood at $620 billion and $639 billion in December and January, respectively, which is 30% higher than the 2019 levels of both markets.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.