Global benchmark Brent crude futures corrected 17 per cent in the three months leading to September 2024, dragged down by the anticipated supply hike by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) and weak demand from China. This brought prices down from the April 2024 peak of $91.2 per barrel. On Monday, Brent rose above $80 per barrel for the first time since August after more than a three per cent daily gain.
D-Street experts say lower crude prices, stable macro fundamentals, and potential monetary easing should anchor India’s valuations, diminishing the likelihood of a significant market correction in the near term. India has been resilient amongst emerging market (EM) peers during crude corrections.
According to domestic brokerage firm Elara Securities, these favourable conditions and historical performance support a constructive outlook for the Indian market in the next three months. India has consistently demonstrated resilience and outperformance during prolonged periods of crude price declines.
Between FY08 and FY20, a period characterized by a 12 per cent annualized decline in crude prices, the NSE Nifty 50 delivered a five per cent gain, and MSCI India outperformed MSCI EM by 67 basis points (bps) in dollar terms. Even during shorter crude correction phases, the Nifty posted a median performance of four per cent, with MSCI India outperforming MSCI EM by eight bps.
Historical data suggests that, in terms of crude price movements and related impacts on the Indian equity market, sustained periods of crude price declines have consistently acted as a positive catalyst for Indian equities. In longer phases of declining crude prices, the correlation between Brent crude futures and the outperformance of MSCI India versus MSCI EM was -0.74, indicating strong relative outperformance of Indian stocks.
(FY02-08): During this period, Brent surged by 25.3 per cent, while the Nifty posted a robust gain of 27 per cent, reflecting the market’s resilience despite rising input costs. MSCI India outperformed MSCI EM by 1000 bps, indicating that India's structural growth story remained intact despite higher oil prices.
(FY08-20): Brent witnessed a significant decline of 11.6 per cent, translating into a 5.1 per cent gain for Nifty. MSCI India versus MSCI EM ratio had a high negative correlation of -0.74 with Brent, indicating that falling oil prices were a major driver of India's relative outperformance.
(FY20-24): Another strong phase of crude price increase (29.2 per cent) saw the Nifty gain 28.0 per cent, while MSCI India continued outperforming EM by 1,480 bps.
Sectoral performance has been a mixed bag during these phases of correction. Domestic cyclicals such as Capital Goods (5.5 per cent), Banks (4.2 per cent), and Automobiles (5.8 per cent), along with defensive sectors such as FMCG (7.5 per cent) and Pharma (4.9 per cent), have consistently outperformed.
In contrast, high-beta sectors such as Metals (13.4 per cent) and Real Estate (3.8 per cent) have lagged. This divergence can be attributed to “risk-off” sentiments, led by concerns over global demand and recessionary risks during crude corrections in the past.
During periods of a crude price drop, metals tend to struggle, with an average decline of 13.4 per cent. However, once crude prices stabilize, metals emerge as the best-performing sector, delivering a robust 71 per cent return in the 12 months following the stabilization. A rebound leads to this recovery in global demand and commodity prices.
Lower crude prices benefit building materials, FMCG, chemicals, and pharma, which benefit from lower input costs, resulting in improved profitability. Earnings growth for these sectors during FY08-20 stood at 17 per cent, 14 per cent, 12 per cent, and 10 per cent, respectively.
While highly sensitive to fuel costs, sectors such as logistics typically show robust revenue growth during low crude prices but may experience margin pressure due to the competitive environment.
Building Material: This sector exhibits a strong correlation between lower crude prices and improved profitability, with an average EBITDA margin peaking at 17 per cent when crude prices are in the $61-75/bbl range. A 10 per cent decline in crude prices typically leads to a 57 bps improvement in EBITDA margin.
FMCG: Lower crude prices reduce packaging and transportation costs, resulting in an average EBITDA margin of 20 per cent when crude is in the $61-75/bbl range.
Pharma: Benefiting from a 50-70 bps improvement in EBITDA margin for every 10 per cent drop in crude prices, Pharma's average EBITDA margin remains stable, peaking at 22 per cent when crude prices are between $75/bbl and $98/bbl.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
