We do not rule a possibility of US yields rising to say 4.5 percent from current 3 percent. We believe this will be a big negative for global equity markets.
Due to geopolitical concerns, supply shocks in Venezuela, Mexico and Libya sustained production cuts despite targeted moderation of Organisation for Economic Co-operation and Development (OECD) inventories, tight demand-supply balance amid declining production and a weak dollar are some of the key factors which led to a rise in Brent crude oil price to $80/bbl.
A meaningful rise in Brent crude oil price is challenging India’s fiscal/current account deficit maths, raising inflation fears and concerns on India’s credit rating upgrade. This is damaging investor sentiment in an election heavy year.
India’s crude oil import dependence on oil consumption is 81-83 percent which makes it highly sensitive to oil price movement. India is a net importer of around 3 million barrels per day of crude oil, resulting in a sensitivity of $11 billion: 40 basis points impact on GDP for every $10/bbl move in oil.
The impact of rising crude oil price is clearly visible on the USD:INR. The rupee depreciated about 7 percent since January as CAD has increased. Higher crude oil prices have a double whammy on the Indian economy. We do not rule out the possibility of fiscal slippage ahead of the general election due to be held in April-May 2019.
Higher crude oil price will increase raw material cost, working capital requirements and operating cost for user industries such as lubricants, chemicals (including consumer staples) and paints. Stock prices of these companies have already started discounting these negative factors.
Along with crude oil prices, Singapore Jet Kerosene price has also increased. This can impact margins of airline companies. Weak rupee against the dollar will further add to woes. Rising prices led to higher working capital, interest and operating cost.
On the flip side, a weak Indian currency is positive for exports. We believe higher oil prices and weaker currency will be positive for upstream exploration companies like Oil and Natural Gas Companies (ONGC), Oil India and Selan Exploration.
The recently hiked domestic gas price and potential increase in domestic gas price on October 1, 2018 will also support earnings in FY19e.
Investors need to pay paramount importance to a rise in bond yields which can spike on rising inflationary concerns, balance sheet tightening and rate hike by the Fed, and major capex planned by the US. We do not rule out a possibility of US yields rising to say 4.5 percent from 3 percent at present. This will be a big negative for global equity markets.Disclaimer: The author is Deputy V-P Research at Kotak Securities. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.