Tracking historical trends: How crude oil prices, stock valuations seesaw

A sharp rise in crude oil prices also affects the markets through its adverse effects on the exchange rate

A sharp sell-off in the Indian equities markets after a spike in crude oil prices should not be surprising. Historically there is a negative correlation between stock valuations in India and the price of Brent crude oil, which is the benchmark for the Indian crude oil basket.

Between 2011 and 2014, crude oil traded above $100 a barrel for an extended period, the Sensex-trailing price/earnings (P/E) was 18X, on average, during the period, nearly 22 per cent lower than the current index P/E of 23X.

The Sensex-trailing P/E multiple is down 17.2 per cent since the beginning of the current calendar year