Credit Suisse downgrades India to underweight on soaring crude oil prices

Global research and brokerage house Credit Suisse has downgraded Indian equities from ‘overweight’ to ‘underweight’ citing soaring oil prices that hit a 14-year high of over $140 a barrel in trade on Monday. 

“Because of its strong structural prospects and robust EPS momentum, we will look for opportunities to re-enter the market, but today we tactically cut our India position from overweight to underweight. Higher oil prices hurt the current account, add to inflationary pressures and increase sensitivity to Fed rate hikes,” wrote Dan Fineman, co-head of equity strategy for Asia-Pacific at Credit Suisse in a coauthored note with Kin Nang Chik.

The funds excess available with Credit Suisse as a result of India's downgrade will be used to buy Chinese stocks, it said while upgrading the stocks to overweight (Market Weight earlier).

“We raise our Malaysia Overweight from 1.1x benchmark to 1.2x on positive commodity exposure, cheap multiples and the market’s safe haven status. We trim our Korea Overweight from 1.2x to 1.1x benchmark due to high oil imports, and lower Singapore from 1.4x to 1.2x on a less hawkish stance by the Fed. We reduce Thailand from 1.2x to 1.1x on a potential hit to tourism from Russia and Europe,” Credit Suisse said. CLICK HERE FOR THEIR MODEL PORTFOLIO

The key assumptions for these tactical changes, according to Credit Suisse, include longer-than-expected high oil prices, the Fed hikes slower than anticipated, but the terminal points for end of this year and 2023 do not change much, or  it hikes too much and pushes the US (economy) into a hard landing.

Brent crude of $120 a barrel, Credit Suisse estimates, could add $60 billion to India’s import bill. Price rises for gas, coal, edible oils and fertilisers could add another $35 billion. Inflation, as a result, could be higher by 100 basis points (bps).

“In total, the current account could fall by close to 3 per cent of GDP. If oil stays above $120, the hit would be bigger. A weaker current account could magnify a previously diminishing vulnerability to Fed rate hikes and global bond yields. Historically, when India’s current account deficit was large, market correlations with US bond yields was lower than recently, when a stronger current account led to more favourable correlations,” the Credit Suisse note said.

Fiscal worries

Those at Kotak Institutional Equities, too, expect India's fiscal worries to increase should the oil prices stay elevated for too long, and estimate the Indian economy to incur an additional $70 billion burden (1.9 per cent of GDP) versus fiscal 2021-22 (FY22) levels at an average crude price of $120 per barrel.

A hike in auto fuel prices, the Kotak report said, will strain households' budget as they will have to bear the bulk of the burden of higher petrol, diesel and LPG prices assuming oil companies do not bear any share and the government bears some share.

“We estimate the direct impact at $22 billion. In addition, they will also bear the indirect impact of higher fuel and freight costs as and when companies pass them on to consumers. The impact will get diffused across 350 million households but the burden will fall disproportionately on lower- and middle-income households,” the Kotak note said.