Home Market Crude’s rally to $80 is just the beginning! How to deal with...

Crude’s rally to $80 is just the beginning! How to deal with it


Investors on Dalal Street have many sticking points. But it's oil that's giving them pain no end.

In fact, oil is on fire. Consider its jump since January, that is a scary 20 per cent. And it has topped $80 per barrel — a first since 2014.

And the heat is everywhere, more so for equities. Tumbling equities have knocked off over Rs 1.50 lakh crore investor wealth this week. Market capitalisation of BSE listed companies are down to Rs 148.39 lakh crore on May 18 (around 9.40 am), from Rs 150.22 lakh crore on May 11.

Higher crude oil prices mean more trouble for the Indian economy. That's because India's oil import is a big drag on its finances and any spike stokes worries about inflation and twin deficits — fiscal and current account.

A 10 per cent rise in global crude oil prices, according to a report, lifts headline CPI by 20-30 basis points and every $1 rise per barrel in Brent price adds $1.8 billion to Indias oil import bill.

US President Donald Trumps decision to withdraw from the 2015 nuclear deal and reimpose sanctions on Iran has wrought havoc.

On top of all that, the rupee has its own truckload of woes to share. It cracked below 68 mark against the dollar for the first time since January last year.

Market Expert Ajay Bagga in an interaction with ETNow, said, “IT is well positioned. So, play the rupee. Besides, domestic consumption, FMCG, durables, housing equipment suppliers, two-wheelers could be looked at.”

Analysts are throwing their weight behind crude oil. Amit Khurana, head of equities and research Dolat Capital, said, “We are bullish on oil and that is a negative for oil marketing companies (OMCs). Therefore, we are suggesting moving away from OMCs to city gas distribution companies (CGD). We are backing CGD on the assumption that the pricing regime is far easier to predict and far more visible.”

In an interaction with ETNow, Khurana said: “They are not subject to the government intervention and in general, we find the play on the green energy, the more eco-friendly energy space coming in from the government. That itself has a big volume push for all these companies.”

Oil marketing companies as well as gas players have all played a catch-up game with benchmark indices so far this year. Year-to-date, OMCs such as Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC) plunged up to 23.5 per cent till May 17.

Gas players, including IGL and Mahanagar Gas, came down by 19.60 per cent and 21.90 per cent, respectively, during the same period. On the other hand, Gujarat Gas has jumped 3.60 per cent. The BSE Sensex is up around 4 per cent.

According to Nirmal Bang, crude oil continues to be the leading commodity since the start of 2018 and the trend is unlikely to reverse in the next 4-6 weeks.

Fatih Birol, ED, International Energy Agency, told ETNow: “We have seen a strong demand growth in 2017 and 2018. Plus, Venezuela production is falling substantially. Only in two years, Venezuela production gets divided and we expect perhaps the worse to come."

He said further: "Also, some key producing countries do not want to increase production as they have a Vienna agreement, which also underlines the fundamentals of the oil markets today. So, if there are some geopolitical developments on top of this tight market, it may have further implications in months to come.”

The dynamics are fluid. So, go for those companies where earnings growth is visible, advise experts.

Rajat Rajgarhia, CEO-Institutional Equities, Motilal Oswal Securities, said, “We are advising investors to remain pro-growth. Right now, a large part of the portfolio is focused on companies where earnings growth is good because if this year remains a year of earnings recovery, whichever stocks benefits, will keep doing well."

He also referred to a smaller part of the portfolio where earnings recovery may take hold with a lag of 1-2 quarters, with deep underlying correction.

BSE IT and FMCG indices have rallied over 18 per cent and 5 per cent, respectively, so far in 2018. In comparison, the BSE Auto index is down nearly 7 per cent.

Original Article


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