A combination of lower crude prices, stable macro fundamentals, and potential monetary easing should anchor India’s valuations, diminishing the likelihood of a significant market correction in the near term. These favorable conditions with historical performance support a constructive outlook for the Indian market in the next three months.
India resilient amongst EM peers during crude corrections
India has consistently demonstrated resilience and outperformance during prolonged periods of crude price declines. Between FY08 and FY20, a period characterized by a 12% annualized decline in crude prices, the Nifty delivered a 5% gain, and MSCI India outperformed MSCI EM by 67bps in dollar terms. Even during shorter crude correction phases, the Nifty posted a median performance of 4%, with MSCI India outperforming MSCI EM by 8ppt.
Sectoral performance: A mixed bag during crude corrections
Sectoral performance has been a mixed bag during these phases of correction. Domestic Cyclicals such as Capital Goods (5.5%), Banks (4.2%), Autos (5.8%) along with defensive sectors such as FMCG (7.5%) and Pharma (4.9%) have consistently outperformed. In contrast, high-beta sectors such as Metals (13.4%) and Real Estate (3.8%) have lagged. This divergence can be attributed to “risk-off” sentiments, led by concerns over global demand and recessionary risks in the past during crude corrections.
Bottom line gains on lower input cost
Key beneficiaries are Building Material, FMCG, Chemicals, and Pharma, which stand to benefit from lower input costs, resulting in improved profitability. Earnings growth for these sectors during FY08-20 stood at 17%, 14%, 12% and 10%, respectively. Sectors such as Logistics while highly sensitive to fuel costs typically show robust revenue growth during periods of low crude prices but may experience margin pressure due to competitive environment.
Metals are a late cycle play
Metals stands out as a strategic play during crude corrections, given its positive correlation with global growth prospects. While a 10% decline in crude prices may result in a 6.4% revenue drop in the short term, the sector historically achieves the highest EBITDA margin (23%) when crude prices stabilize within the USD 61-75/ barrel range. Metals has also been the top-performing sector, delivering +71% return in the 12-month period following a stabilization in crude prices.
