Political certainty protects Indian stocks from soaring oil prices: Morgan Stanley

Falling oil intensity in GDP and rising share of domestic investors are among other reasons, foreign consultancy says

Despite an oil supply shock, Indian interest rates, currency and equities appear to be relatively calm for six main reasons, Morgan Stanley said. The global financial advisory firm has analyzed the probable reasons to understand whether it is a “calm before a storm” or a new market dynamic.

According to his study, political certainty, declining oil intensity in GDP, high relative real policy rates, growing share of FDI versus REITs in external balances, growing share of domestic investors, and calm INR and interest rates are the main reasons for stability in India. shares.

Sensex, Nifty vs global indices

While the BSE Sensex and Nifty have fallen 6.73% and 6.39% respectively since the start of the year, the Nasdaq and S&P 500 have fallen 14.91% and 9.18% respectively. The Dow Jones Industrial Average also fell 7.49%.

Among major European stocks, Dax (Germany) and CAC (France) fell 17.57% and 15.26% respectively. The British FTSE is however relatively stable, having only fallen by 5.38%. Nikkei (Japan) fell slightly by 9.75%.

Supply-limited oil price increases are bad for India. Indeed, the recent 25% jump in oil prices will increase the current account deficit by 75 basis points and inflation by 100 basis points on an annualized basis.

“Historically, India’s relative stock prices to emerging markets (EM) have reacted poorly to oil price increases caused by supply disruptions,” Morgan Stanley said.

“We measure the latter using the price of oil relative to copper (the underlying assumption being that both commodities react similarly to global demand conditions and therefore their relative prices to relative supply conditions) and the New York Fed’s Oil Price Dynamics Report. The strong association between these indicators and India’s relative performance against emerging markets appears to be breaking down in recent years,” Ridham Desai said. , equity strategist with Sheela Rathi (equity analyst) and Nayant Parekh (equity strategist), in a report.

“India’s political environment is the strongest”

India’s political environment is one of the strongest in the world, driving India’s idiosyncratic growth and, more importantly, likely creating a new profit cycle.

“Rising oil prices are a threat but not strong enough in the context of the political environment,” they added.

In addition, India’s relative real policy rate to the United States is at an all-time high, Morgan Stanley said, adding, “Monetary policy appears much better placed to manage the inflationary impact of a rise in oil prices, especially relative to history.”

IDE flow

India used to rely mainly on foreign portfolio investment (FPI) flows to finance its current account deficit. REIT flows tend to react more aggressively to the effect of oil prices on equities and their actions feed into the macro, creating a vicious cycle. However, since 2014, external financing has shifted dramatically towards foreign direct investment (FDI) which is more stable and less sensitive to fluctuations in oil prices, the report further explains.

According to Morgan Stanley, the rise in domestic supply on equities since 2014 also means that the sale of REITs is now compensated, unlike in the past.

“The above factors probably explain why interest rate and currency markets have been relatively stable compared to previous oil shocks. Thus, stocks have also reacted less violently,” summarizes the report on the reasons for stability. relative to the Indian stock market.

Is this shift in oil’s impact on equities structural or are the markets assuming oil prices will reverse quickly or does it take another $10-20 rise in oil prices to wobble the stock market? “We’re not sure but the next few days may answer those questions,” Morgan Stanley said.

Published on

March 05, 2022

Richard L. Militello