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Effects of Japan tsunami on Indian stock markets

Mar 15, 2011

Every time a natural disaster strikes some part of the world, we see business media predicting gloomy days ahead for the world stock markets. This time we already came through a few sensational headlines like, 'Japan Tsunami rattles world stock markets'. True, that the earthquake was devastating for the people of Japan but it may not really mean depressing times for the Indian stock markets or the Indian economy. Here are a few parameters that will help gain perspective to assess the impact of this event.

Impact on Indian Stock Markets
Generally when we refer to the Indian stock markets it typically means the Indian indices - Sensex or Nifty. These indices basically are weighted averages of selected stocks from different sectors/industry. So to understand the effect of the earthquake and tsunami in Japan on the Sensex, we need to understand the exposure of Sensex companies to Japan. The main sectors having exposure to Japan are Autos and Information Technology. But the effect on companies should not be too significant.

Impact on Indian Economy
Consider this:

- India's trade with Japan is just 2% of India's total foreign trade.
- Exports to Japan are half of imports from Japan.
With this information in mind, the impact on the Indian economy prima facie looks negligible.

Impact on Crude Oil
Japan is third largest consumer of crude and consumes around 4.3 m barrels a day of crude oil. World crude oil consumption is 85 m barrels a day. Due to the catastrophic earthquake, few of the refineries in Japan have been shut due to fire. Bloomberg report suggests that Cosmo Oil's and JX Nippon Oil shut down its refineries totaling a production of 742,000 barrels a day of crude oil. Other refineries may also follow suit depending on the damage. This may lead to decrease in temporary demand for crude oil and may lead to softening of crude oil prices.

What after earthquake?
The aftermath of earthquake will spur demand in reconstruction activities, buying new cars, healthcare and consumer products in Japan. But this comes at a price. The reconstruction activities like ports, roads, rail, and airports among other will have to be paid off by the government of Japan and that can weaken its economy further. Plus there would be a huge psychological impact that also comes into play.

We are in no position to forecast the actual impact of this episode on India but we can surely say that be very cautious when you next read a sensational headline like 'Japan Tsunami rattles world stock markets'.

Although this may cause a temporary blip in the stock markets, what matters is the scenario from a long term perspective. And this looks positive, given that India's growth story remains on track. This means that any correction in prices should be looked upon as an opportunity to pick up good quality stocks if the valuations are right.

Data Source: India Exim data, Bloomberg, www.eia.gov

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