In recent months, Brent crude futures experienced a significant correction, dropping by 17% due to a combination of supply increases from OPEC+ and waning demand from China. This decline brought prices down from a peak of USD 91.2 per barrel in April 2024. Analysts suggest that a sustained dip of 1% in crude oil prices could stimulate domestic growth by approximately 3.5 basis points (bps) and ease consumer price index (CPI) pressures by around 11 bps, indicating a potential economic boost for countries reliant on oil imports.
As the global market adjusts, India stands out as one of the resilient emerging market (EM) peers amidst crude price corrections. The convergence of reduced crude prices, stable macroeconomic fundamentals, and the possibility of monetary easing positions India favorably. These factors collectively anchor valuations and significantly minimize the chances of a severe market correction in the foreseeable future. With historical performance trends supporting a positive outlook, investors can expect constructive developments within the Indian market over the next three months.
India’s Resilience During Crude Price Declines
India has consistently showcased robust resilience and outperformance during prolonged periods of declining crude prices. Between FY08 and FY20, an era marked by an average 12% annual decline in crude prices, the Nifty index achieved an impressive 5% gain. Moreover, during this period, MSCI India outperformed its emerging market counterpart, MSCI EM, by 67 basis points when measured in dollar terms. Even during short-term corrections, the Nifty recorded a median performance of 4%, highlighting India’s consistency and strength in the face of global fluctuations.
Sectoral Performance: A Mixed Response
While the overall performance of the Indian market has been commendable during crude corrections, the responses among various sectors have been notably varied. Domestic cyclicals, including Capital Goods (5.5%), Banks (4.2%), and Autos (5.8%), alongside defensive sectors such as Fast-Moving Consumer Goods (FMCG) (7.5%) and Pharmaceuticals (4.9%), have generally outperformed. In contrast, high-beta sectors like Metals (13.4%) and Real Estate (3.8%) have lagged. This divergence can be largely attributed to heightened “risk-off” sentiments driven by global demand concerns and recessionary risks often associated with crude price declines.
Bottom Line Gains from Lower Input Costs
Various sectors are positioned to significantly benefit from reduced input costs stemming from lower crude prices. Key beneficiaries, including Building Materials, FMCG, Chemicals, and Pharma, are expected to see improved profitability. Notably, the earnings growth for these sectors during the past decade has averaged 17%, 14%, 12%, and 10%, respectively. However, sectors like Logistics, which are highly sensitive to fuel costs, might report robust revenue growth during low crude price periods but could face margin pressures due to increased competition.
Metals: A Strategic Late-Cycle Investment
In the context of crude corrections, the Metals sector emerges as a strategic investment option, given its positive correlation with global growth trajectories. Although a 10% drop in crude prices may initially lead to a 6.4% revenue decline for the sector, historically, Metals tend to achieve the highest EBITDA margins at 23% when crude prices stabilize within the range of USD 61-75 per barrel. Furthermore, following stabilization, this sector has historically outperformed, delivering remarkable returns of +71% in the subsequent 12-month period.
