Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Where to invest? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 9, 2004

    Where to invest?

    The future course of action on the stock market is likely to be determined by two key factors viz. crude prices and interest rates. We take a look at how both these factors could impact various sectors and in an inflationary environment, what could be investor's strategy?

    The impact of high crude prices on the stock market is two-fold viz. on the economy side (inflation, government fiscal deficit and interest rates) and on corporates (raw material cost and lower demand for goods due to rise in prices of goods). Though this is a complex topic, we have tried to simplify, some aspects may not be dealt with in detail.

    On the economy side...

    Firstly, almost 70% of India's requirement of crude oil is met from imports. Considering the fact that demand for crude has been steadily rising over the years, when prices are higher, the government has to pay more. There are two implications.

    One, since the petroleum sector is highly subsidized, the government shares some part of higher cost of crude by keeping prices of petroleum products like diesel, petrol and LPG lower (this benefits consumers). Since this subsidy is a part of government's profit and loss account, expenditure increases. If income does not rise proportionately, deficit (expenditure minus income) increases. So, the government has to borrow more to bridge the loss.

    Secondly, when crude prices increase, as we mentioned earlier, the subsidy bill of the government goes up and more importantly, petroleum product prices have to be increased to prevent oil companies from going into losses. So, the government, in consultation with companies like BPCL and HPCL, hikes petrol and diesel prices. This has an inflationary effect directly (input cost for corporates and consumers goes up) and indirectly (transporters hike charges).

    Since Central Banks across the world are concerned with inflation, they may increase interest rates to slowdown the economy. To understand more about how inflation affects Monetary Policy, click on the link.

    On the corporate side...

    Here is a snapshot of the impact of crude prices on some sectors.

    Aluminium - Power cost could increase. But firm prices could provide some cushion in the near-term.

    Automobiles - Higher diesel and petrol cost could slowdown demand. Rise in interest rates will impact demand, as most of the purchases are financed.

    Banks - If Reserve Bank of India (RBI) were to rise interest rates (which is likely to happen), retail credit (the key growth driver at the topline level for the last five years) could suffer. Housing and car loan disbursals, especially, could be affected.

    Cement - Power and freight cost likely to increase and thus, could limit margin expansion even as prices are increasing.

    Pure refineries - In the current scenario, likely to benefit from higher margins, as prices are globally benchmarked. However, the government indication of maintaining a flexible duty structure (reduce duties when prices breach the upper limits of the price band and increase the duties in case of a downward shift) could impact the margins.

    Refining and marketing companies (like BPCL) - If retail prices are not increased, will have to share additional burden and profitability could suffer (as it did in FY04).

    FMCG- As cost of daily needs increase, topline growth could suffer.

    Engineering - Economic slowdown could result in order book growing at a slower rate.

    Power - Plants those are dependent on crude products as a source of power generation could be hit.

    Which sector to be in? - Considering the possibility of interest rates heading north, we suggest investors to be cautious when it comes to high capital-intensive sectors like commodities (refineries, steel, aluminium, power and so on). Any company with high debt-equity ratio should be viewed with caution. Though most of the corporates have already finalised their funding plan, one needs to exercise caution when it comes to mid-caps. Sectors like software, pharma and capital goods (will benefit from higher capital expenditure from corporates) could be less affected. At the same time, we advise investors to exercise caution when it comes to valuations, as some stocks are expensive in these sectors as well. Invest in a staggered manner or if one does not have the expertise, a conservative mutual fund is a better option in uncertain times.

    How could investors allocate their assets?

    As we mentioned during our Monetary Policy analysis,

    If interest rates are likely to move up: Among various asset classes the allocation is likely to be more skewed towards property (borrowing a loan and locking it at a lower rate), equities and short term fixed deposits. The allocation towards long-term debt mutual funds should be lowered. Though a rising interest rate scenario is not completely favorable for equities, the decision to invest in equities or other instrument is purely a matter of risk profile and the relative attractiveness. Gold is also a good option in an inflationary environment. Compared to what a fixed deposit and debt mutual fund, the case for equities even now is very strong.



    Equitymaster requests your view! Post a comment on "Where to invest?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)