Are high oil prices always bad for market sentiment? No, suggests data

Even with oil prices ruling at $110 and $108/bbl in FY13 and FY14 respectively, the Nifty 50 managed to post a gain of 7.3 per cent and 18 per cent in each of these two fiscal years

High oil prices do not always dampen market sentiment in India, shows data. From a low of $62.78 on May 30, Brent crude oil prices have surged 23 per cent to a high of nearly $77 per barrel (bbl) amid geopolitical tensions. Despite this, the BSE Sen­sex, amid volatility, has ma­n­aged a gain of 0.6 per cent during this period, according to data. 

In the financial year 2012-13 (FY13) and FY14, with oil prices averaging $110/bbl and $108/bbl respectively, the Nifty 50 managed to post a gain of 7.3 per cent and 18 per cent. India’s economy grew at a healthy clip of 5.5 per cent in FY13 and at 6.4 per cent in FY14. Triple-digit crude oil prices were common from 2007 to 2014, said G Chokkalingam, founder and head of research at Equinomics Research.  

Things changed from 2014 as the US increased production and shale gas came into play. 

“There were some structural changes. Alternative sources of energy such as solar and wind also took centre stage, besides crude oil, post 2013-14. Oil and stock markets had started to discount higher shares of these two sources back then. A higher oil price is not always bad for the market, unless it runs away too fast, too soon and stays elevated for a long time,” Chokkalingam added. 

In FY22, the Nifty 50 index rose around 19 per cent and crude oil prices averaged $81/bbl, up 81 per cent from FY21. Even when crude oil prices increased 19 per cent to an average of $96/bbl in FY23, the Nifty 50 index fell a modest 0.6 per cent.   

Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers Global, said equity markets may not react much to the Iran–Israel conflict, as policies from central banks remain well supportive, including in India. 

He believes that Indian equities may at best see some knee-jerk reaction and sectors like defence, information technology (IT), and pharma may outperform others. “Banks, logistics, and interest-rate-sensitive sectors like non-banking financial companies and real estate may underperform in the near-term,” Gohil said. 

Dangerous complacency 

Most global stock markets are showing a “dangerous complace­ncy” in response to the war between Iran and Israel, cautions Nigel Green, chief executive officer  of deVere Group, a global consulting firm. deVere has $12 billion in assets under management (AUM). Sector-wise, the most imm­ediate reaction is likely to be a rotation out of rate-sensitive and consumer-driven buckets, analysts said. 

Travel and tourism companies, which are highly vulnerable to energy costs and geopolitical disruptions, are expected to come under pressure. “There is likely to be an increased investor appetite for energy producers, commodity firms and companies tied to defence. With military budgets already rising in several developed economies, firms linked to security, surveillance, aerospace and weapons manufacturing are well-positioned to benefit from a surge in demand. Consumer staples and utility companies, with stable earnings profiles and pricing power, may also draw inflows in this higher-volatility environment,” Green said.   

Meanwhile, the risks to global energy markets are growing as Iran could choke the Strait of Hormuz, which carries around 17 million barrels of oil per day (about 20 per cent of global supply). If the conflict persists, analysts at Rabobank International see oil prices hitting $150/bbl in the worst-case scenario amid panic buying. 

Gohil, however, feels that a large part of the impact of the ongoing Iran–Israel conflict on oil is already factored in. 

“Oil may see a significant spike if Iran chokes major trade routes or Russia gets directly involved in the conflict. In the medium-to-long term, the supply response may help keep oil prices in check,” Gohil added.