Friday, March 2, 2012

>INDIA MARKET STRATEGY MARCH 2012: March: An “Eventful” Month but oil as important

Focus on the 3 events ….
Over the next couple of weeks, 3 events will be important for markets. Given the sharp rally in markets, expectations are high and the market could be vulnerable to a correction on any disappointment. However, price of oil may be as important as these events in determining the market direction (and of course will affect two of these events).

1. March 6 - Assembly election results: A Congress strong performance with a kingmaker role in Uttar Pradesh positive for markets. 
2. March 15th - Credit Policy: Consensus and our expectations are for a rate cut but high oil prices persist, RBI may do a CRR cut only.
3. March 16th – Budget: The key to watch is the fiscal deficit estimate.

… but oil prices as important
While an increase in crude oil is clearly negative for India’s macro-economy, the co-relation of Indian stock market and oil is strongly positive ie a rising crude oil prices lead to a rise in equity markets (co-relation is strong at 89%). However, this relationship turns negative at a tipping point (and we may be close to it) ie Indian markets fall even as crude continues to rally.

Sharp crude rallies break this co-relation: On 10 occasions over past 10 years we have seen a rally in crude prices by over 30% in 3 months. On 6 of these 10 occasions, markets gave a negative return over the next quarter. Similarly, India under-performed EMs on 8 of these occasions

Rising crude oil hurts the economy in 3 ways…
1. Inflation: A 5% increase in domestic oil prices increases inflation directly by app 75 bps (see Table 3)
2. Current account deficit: Oil accounts for 30% of total imports. A $10/bbl increase in oil prices will increase current account deficit by $8bn (0.4% of GDP).
3. Fiscal Deficit: Every $15/bbl increase in oil price can lead to an increase in fiscal deficit by roughly 0.3% of GDP assuming a 10% increase in domestic oil prices (see table 5).

.. but the positive is that the tipping point has gone up
In a macro sense, oil, at US$110/bbl today, is like oil at US$70/bbl in 2007. For example, net oil imports remain around 4% of GDP and the oil subsidy around 0.8% of GDP similar to 2007 although oil prices are over 50% higher.

To read full report: MARKET STRATEGY