Fall in oil prices on downturn fears a concern for India: Morgan Stanley

Morgan Stanley said the decline in oil prices would be a cause for concern for Indian equities if the oil market is right about its assessment of a global slowdown. The brokerage said while falling oil may seem good for India’s economy, earnings and shares, in practice, the impact depends on the reasons and duration of the fall.

“We think it is safe to say that the recent bearishness in the oil markets is being led by growing concerns about slowing demand, and to that extent, its positive impact on India‘s terms of trade is diluted greatly,” said Morgan Stanley’s strategists, including Ridham Desai, in a client note.

Oil prices have dropped over 10% in the past two weeks on worries demand could be hit in the event of a probable slowdown in the US and China. Brent crude futures stood at around $71 a barrel on Monday with analysts forecasting prices to fall below $70 in the coming days. Earlier in 2021, crude prices were at $90 a barrel.

Morgan Stanley said there is no reason to be more optimistic because oil is down. “If anything, if the oil market is right in its concerns about global growth, then we should be worried for absolute share prices,” said the brokerage’s strategists.A fall in oil prices is seen as a positive for India as the country imports over 80% of its crude requirements.
“We see no way to estimate how a US$1 change in oil price affects the Nifty EPS. It is a non-linear relationship that depends on quantum of the oil price move and the reasons for it, and how sustained the fall in oil is,” the strategists said.
Morgan Stanley said the market may start anticipating interest rate cuts if the fall in oil prices continues. “In such an event, we would expect non-bank lenders to be the biggest gainers in terms of stock performance, following by domestic consumption stocks and, possibly, large private sector banks,” said the brokerage.