Falling crude prices, corrections make stocks attractive
City: 

The sharp fall in crude prices over the past few days could prove to be a boon for the Indian market as the domestic economy would benefit from the drop in fuel prices. Crude prices fell below $60, nearly wiping out the year’s gains and extending an oil price rout as rising US oil production and crude stockpiles put pressure on oil prices. A stronger dollar has also been a continuing factor for the decline.

Meanwhile, record US oil production is raising crude inventories with production at 10.6 million barrels a day, leading to a glut in crude which is driving prices lower.

Benefits for India

Lower crude prices bring plenty of benefits to India, which imports most of its oil requirements, analysts said. It would lower inflationary pressures as well as have a positive effect on the current account. Falling crude prices will be a major tailwind for the domestic economy as it will heap pressure on inflation. Consumer price index (CPI)-based inflation fell marginally in January, mildly pulled down by 60 bps decline in fuel inflation, said experts.

In fact, crude prices fell as low as $35 per barrel at the start of 2016, but they have been rising since, reaching a three-year high of more than $70 per barrel last month and was a major risk factor for the Indian economy. Many analysts now see the fall in crude prices as a major positive for the Indian economy as well as the equity markets.

“If oil goes below $60 a barrel then India’s fiscal situation will dramatically improve and that will bode well for stock markets,” said an analyst with leading domestic brokerage.

Falling crude prices and recent corrections in the equity market has made stocks quite attractive. Over the past few weeks the market witnessed a huge correction on the back of global sell-off in equity.

“Fundamentally we are seeing a correction in the market which can loosely be termed as selling off or panic but this was long overdue. We have seen global markets and domestic markets ride the wave on the back of liquidity. The liquidity in the environment of lower inflation pulled up the equities across the globe and later it spanned to Energies and Precious metals. So this is just a price wise correction which was due as we have seen stretched valuations,” says Mustafa Nadeem, CEO, Epic Research.

“We have been needing a correction as it’s a leveraged market and prices need to adjust to get the weak money out and let smarter money add or position size to make sure the bullish wave establishes a fresh bottom for next wave. We have seen an almost 8-9 per cent move in correction and this may further stretch to 10-12 per cent but that will ultimately lead to a healthier market at the end of this tunnel,” Nadeem further said.

Concerns

Even though there are concerns about the overall outlook on the equity market following the rise in bond yields across the markets and fear of rising interest rates by the central banks, experts are predicting that things would not be that bad for equity investors.

“To be clear, we do not think rising interest rates and inflation will kill the bull market in global equities. However, we do think they have reached a level that makes our long-standing argument of higher equity valuations much more difficult to propagate. This means less of a tailwind from rising P/Es and we would expect stocks to rise much more in line with earnings estimates, but no more,” says Morgan Stanley in a recent report.

Many analysts are predicting that the market would remain sidewise in the short term. And now focus will be on earnings recovery rather than P/E expansion led by low cost of capital which was driving the market till now. The Indian market was looking expensive after the huge rally over the past year and valuations after the recent correction have come off a bit

“The sharp correction in mid-caps makes stock-picking a bit less challenging, as valuation premiums have moderated from the recent highs. While we do not rule out further correction, we believe that (based on our earnings recovery thesis for FY19), this correction offers a good opportunity to accumulate quality ideas where valuations have turned expensive,” Motilal Oswal Securities said in a recent report, adding: “Markets would remain volatile in the short-to-medium-term with a downward bias.”