 "Rise in crude oil prices will restrict market's gains")
Federal Reserve Chairman Ben Bernanke’s comments in support of quantitative easing helped boost market sentiment across the world. Equities, gold, metals and crude oil prices, all went up. India’s Sensex also gained 382 points or 2% on Thursday, and another 303 points on Friday (the latter partly led by Infosys’ results).
But the question is whether these gains are sustainable for India, especially in light of the rise in oil prices.
Last fiscal, India recorded a 6.7% increase in crude oil import volumes leading to its import value rising 8.4% to $168 billion or 34% of its total imports of $492 billion. While the RBI and the government are taking steps to discourage gold imports, oil imports should only rise given the estimated 5.5-6% growth in India’s GDP in FY14. Average gold price is down from $1,654 in FY13 to $1,417 in the June quarter, while crude oil prices averaged $110.50 a barrel in FY13 and $103 in June quarter, thereby providing some respite.
“Increase in crude oil prices will mean that the government will have to maintain cash balance. The balance of payment situation is not good currently. We need to see how the government tackles the situation,” says Manish Sonthalia, VP & Fund Manager at Motilal Oswal AMC.
High oil prices will increase pressure on India’s trade balance, increase government’s fiscal deficit and hurt the rupee, stoking inflation and restricting the RBI from cutting rates which are crucial to lower costs for India Inc and consumers.
For markets as well as foreign investors, what is equally important is earnings growth, which is still not encouraging. While Bloomberg consensus estimates suggest that Sensex earnings will grow by 13-14% in FY14, others like Sonthalia believe the figure may come lower. “On a blended basis, I don’t expect Sensex earnings to be up more than 8-10% in FY14”.
Dhananjay Sinha, Co-Head Institutional Research (Economist & Strategist) at Emkay Global says, “You can’t expect market gains to sustain just because of liquidity. Gains will be sustainable as long as earnings are supportive. Earnings growth is hardly happening. We are expecting 4.5% growth in Q1 for our set of universe”.
Most experts believe that ultimately, earnings growth will matter as global liquidity always chases growth. While the revival in the US economy should help India’s IT, pharma and export-oriented sectors do well and help ease some pressure on the rupee, and importantly support India Inc’s earnings, a lot will depend on the government’s effort to revive economic growth and put its house in order. For now, given the consensus Sensex earnings of Rs 1,426 and assuming India’s 10-year average forward PE of about 14.5, experts believe the upside at best could be 5%.
But the question is whether these gains are sustainable for India, especially in light of the rise in oil prices.
Last fiscal, India recorded a 6.7% increase in crude oil import volumes leading to its import value rising 8.4% to $168 billion or 34% of its total imports of $492 billion. While the RBI and the government are taking steps to discourage gold imports, oil imports should only rise given the estimated 5.5-6% growth in India’s GDP in FY14. Average gold price is down from $1,654 in FY13 to $1,417 in the June quarter, while crude oil prices averaged $110.50 a barrel in FY13 and $103 in June quarter, thereby providing some respite.
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If the global liquidity continues, it should prove supportive of prices across asset classes in the interim period. Currently, while gold is still lower than the Q1 average prices, crude oil is up at $108 and could hurt India.
“Increase in crude oil prices will mean that the government will have to maintain cash balance. The balance of payment situation is not good currently. We need to see how the government tackles the situation,” says Manish Sonthalia, VP & Fund Manager at Motilal Oswal AMC.
High oil prices will increase pressure on India’s trade balance, increase government’s fiscal deficit and hurt the rupee, stoking inflation and restricting the RBI from cutting rates which are crucial to lower costs for India Inc and consumers.
For markets as well as foreign investors, what is equally important is earnings growth, which is still not encouraging. While Bloomberg consensus estimates suggest that Sensex earnings will grow by 13-14% in FY14, others like Sonthalia believe the figure may come lower. “On a blended basis, I don’t expect Sensex earnings to be up more than 8-10% in FY14”.
Dhananjay Sinha, Co-Head Institutional Research (Economist & Strategist) at Emkay Global says, “You can’t expect market gains to sustain just because of liquidity. Gains will be sustainable as long as earnings are supportive. Earnings growth is hardly happening. We are expecting 4.5% growth in Q1 for our set of universe”.
Most experts believe that ultimately, earnings growth will matter as global liquidity always chases growth. While the revival in the US economy should help India’s IT, pharma and export-oriented sectors do well and help ease some pressure on the rupee, and importantly support India Inc’s earnings, a lot will depend on the government’s effort to revive economic growth and put its house in order. For now, given the consensus Sensex earnings of Rs 1,426 and assuming India’s 10-year average forward PE of about 14.5, experts believe the upside at best could be 5%.