The Indian stock markets have seen the worst single-day crash since 2008 on March 12, 2020, as Coronavirus pandemic fuelled growth fears. With the BSE Sensex having lost 20 per cent value in the one-month period so far, automatically fears are high that domestic markets have plunged into bear territory. But even as the negatives, led by over 70 Covid-19 cases in India, pile on for equity investors, the crude oil price drop offers a solid ray of hope. For a net oil importing economy like India, crude oil benchmarks correcting by 50 per cent from their recent highs is very good news. Crude oil has corrected because Saudi Arabia launched a price war as it fights for establishing dominance versus Russia in the global oil market. Who will win the sentiment war? Let us take a detailed look.
Crude oil price drop effects
Few months ago, noted market expert Ajay Bodke, CEO & Chief portfolio manager, PMS of Prabhudas Lilladher, talked about the 'Triveni Sangam' of bountiful monsoons, benign global crude oil prices and further monetary easing to act as 'Sanjeevani' and resuscitate India's comatose Indian equity markets. In March 2020, one of those three factors i.e. crude price, is still in-play, ready to act as more than a tailwind.
Indian economy doesn't produce enough oil that it uses. Hence, we have to resort to costly imports. The prices of the oil price is governed by Organization of the Petroleum Exporting Countries (OPEC). But there is a big price relief today. Crude oil prices are down 30 per cent or around $15/bbl (barrel) in less than a week as the OPEC cartel failed to agree on a production cut. A $10/bbl fall in crude oil price impacts the India current account deficit (CAD) by about 0.4 per cent of GDP. Every $ 1 fall in global crude oil prices leads to savings of nearly $ 1 billion in India's import bill. Crude price drop also pulls down inflation by 25bps and also helps contain the fiscal deficit by curtailing subsidies. It is also quite likely that the fall in crude oil prices is offset to some extent by higher excise duties on petrol and diesel, which will leave more money at the hand of the common people. In the period after 2008, since the sharp rise in crude oil prices tended to have debilitating effect on India’ s macroeconomic fundamentals.
Crude oil price drop also increases the possibility of more interest rate cuts by the RBI. This is because inflation is expected to cool off due to crude price drop. "The fall in crude oil prices increases the probability of a pre-emptive rate cut by the Reserve Bank of India’s monetary policy committee (MPC). Consequently, the bond rally may continue to find support, along with the fall in global yields. Nevertheless, we are not expecting any aggressive rate cuts by the RBI. We also believe that the US-India yield spread will remain around 500-550bps given the current environment of risk aversion," says Nirmal Bang Institutional Equities.
A fall in global crude oil prices is also supportive for the Indian rupee (INR). However, in the near term, Indian markets will continue to take cues from global markets, which along with fears of contagion from the Yes Bank crisis may continue to weigh on Indian equities and the INR. The US dollar trades at 74-level against the rupee, and it remains to be seen how the greenback behaves in the future. Typically, every one Rupee strengthening versus US dollar can lead to another nearly $ 1 billion reduction in import bill, according to Bodke.
Global crude oil prices are unlikely to sustain for very long at current lows. Analysts expect OPEC to eventually agree on a production cut, which may see crude oil prices move back to around $45-50/bbl, while demand will also recover as the Coronavirus subsides.
"Whilst Saudi Arabia precipitated the turmoil this weekend, oil at $30 and below is not supportive for the country’s heavily subsidised economy and precarious finances. Therefore it’s no surprise to see the market moving to price a possible devaluation again," argues Brendan Walsh, senior vice-president and portfolio manager at Franklin Templeton Multi Asset Solutions.
However, even in the range of $45-50 it would still lend support to India’s macros. Lower oil prices are likely to aid higher retail margins for OMCs, which will offset concerns over weak gross refining margins for oil companies.
"Given India's net oil import status (85% of domestic demand imported), oil price decline is a boost for government finances, stimulus for consumption, reduces input costs, leaving apart its negative impact on upstream oil companies. However, the more than normal slide in oil prices could have implications on the stability of financial markets," argues ICICI Securities.
However, a sustained low level in crude oil price complicates the BPCL disinvestment bonanza for the Indian government. DIPAM has released the Preliminary Information Memorandum (PIM) for inviting Expression of Interest (EoI) for the strategic disinvestment of BPCL, along with transfer of management control.
"The $20/bbl+ fall in oil prices is tempting for government to hike auto-fuel excise as even Rs4/ltr hike for FY21 potentially mirrors entire BPCL proceeds. However, it may dampen bidders’ sentiment, and upside risk to oil prices and consequent rollback would still be there," says Emkay Global Financial Services.
Corona, go back
Though we have less than 100 confirmed cases of Coronavirus in India, so far the impact has been much sentimental. China is still reeling under the pandemic and so what happens to bilateral trade with India is still to be assessed. The point to be noted that India’s trade relations with China were not affected during SARS outbreak as total trade with China stood at a mere $ 4.8 billion in FY03 (accounting for 4.2% of India’s total trade). Both exports and imports share from China increased after the SARS outbreak. Present situation (FY2019) is that China is India’s second biggest trading partner, accounting for $87.1 billion in total trade (10.3% share in India’s total trade).
According to Abheek Barua, Chief Economist, HDFC Bank, China is the biggest importing partner, accounting for 14 per cent of total imports in India. China is third largest market for domestic merchandise goods, accounting for 5.1 per cent of India’s exports.
Travel expenditure has come down in India, as people are wary of travelling. The Kerala government has reportedly gone on a lockdown after eight new cases of Coronavirus were detected. The government has imposed several restrictions in the state such as the closing of public spaces like educational institutions and cinema halls till the end of March. Kerala is not alone. All cinema halls to remain shut in Delhi till March 31 due to Coronavirus concerns. Schools and colleges where exams are not being held will also remain closed. At a national level, the Indian government has suspended all tourist and student visas as well as the visa-free entry of Persons of Indian Origin (PIO) card holders for a month beginning March 13, 2020. Incoming travellers, including Indian nationals, are advised to avoid non-essential travel and are informed that they can be quarantined for a minimum of 14 days on their arrival in India.
Money-spinning events like The Indian Premier League (IPL) could be played behind closed doors because of the novel coronavirus, as calls grew to cancel or delay the world's richest tournament. The strange prospect of cricket being played without spectators is also doing the round globally.
Paras Bothra, president (equity research), Ashika Stock Broking, admits the scare in global and local markets is nerve wrenching. "We won’t be able to time the market in terms of bottom, but can systematically stagger the buying on such panic days in stages as a strategy. High quality positive cashflow generating businesses are the best option in uncertain times like this. Though parallels are being drawn with 2008 crash. But this time, the mcap to GPD is quite low, leverage in the system is contained and earning cycle is at its trough and various other economic indicators are languishing at its low. Hence this gives the incremental confidence to not panic in one-off situations like this and rather think of buying in tranches on any further incremental falls in leaders and quality names," Bothra added.
Not everyone is optimistic of a swift turnaround. Edelweiss Research is trimming December Nifty target (to 12,000 from 12,300) anticipating more moderate earnings, while maintaining the 17 times multiple. Risks – to both earnings and multiples – lie to the downside.
"We are modifying the themes that we believe one should follow: liquidity, agri and IT/pharma. We talk down our global upswing theme, which stands meaningfully challenged. In general, we have been cautious: flat market forecast for 2020 with a bias towards stock risk; the virus only stunts the upside. Markets are unlikely to move with the virus’s spread hereon (largely priced in); it’s going to make us want to stay safe with our portfolios, and ourselves," says Aditya Narain of Edelweiss Research.
The Indian markets are tracking US equities very closely. With America in the icy grips of bears, aided by coronavirus fears, Dow Jones ande S&P 500 indices have been falling like nine pins for the week ended March 13. If US recovers, India has some hope. Noted experts from Goldman Sachs say the basic debate regarding the path of US equities in 2020 involves whether COVID-2019 will lead to a proverbial “V-shaped” or “U-shaped” downturn. Uncertainty around the impact the virus is having and will have on business and consumer spending is heightened and explains the dramatic asset volatility in recent weeks. "The current bull market ranks as the longest in history. It started on March 9, 2009 at 677 (for S&P 500) and just celebrated its 11th anniversary. A new bull market will likely be born later this year," hopes David J. Kostin, chief US equity strategist at Goldman Sachs.
While India might be economically relatively better placed, the virus does hit India at the wrong time. It’s running at record-low growth levels – largely domestically driven, there’s risk aversion across the system, and a potential engine for growth revival (i.e. an improving global economy) is now looking plagued by the virus. The timing is particularly onerous for India as all the drivers of revival, whether internal or external, will make the economic recovery harder, less predictable and more back-ended than the market probably envisages.
The inflated equity prices without earnings growth was at risk anyways and the Coronavirus plus the announcement of takeover of Yes Bank was probably the last straw that broke the camel’s back, notes IV Subramaniam, director, Quantum AMC.
"While one has to be careful from getting infected by the virus, the panic in the market could also be an opportunity. We are using the opportunity to reshuffle the portfolio towards companies that can sustain the slowdown in the economy and a changed macroeconomic scenario where rupee could slip and inflation could be higher. In cautious markets we see opportunities and are deploying cash," says Subramaniam, alluding to the silver lining even beneath dark clouds.
The writer is a journalist with 14 years of experience)