As Oil Falls, Indian Equities May Rise by Christopher Gannatti, Associate Director of Research, The WisdomTree Blog
As we approach the end of 2014, one of the year’s biggest stories has been the declining price of oil. On June 20, 2014, Brent was at nearly $115. On November 13, 2014, it fell below $78, a cumulative decline of over 32%.1
Through November 13, 2014, India’s equities, measured by the BSE Sensex, had appreciated more than 30%.2 That is in an environment where broad emerging market equities3 have been basically flat.
India: World’s Fourth-Largest Oil Consumer 4
The bottom line: India uses a lot of oil, but it has very limited oil resources. The country depends on oil imports for more than 70% of its oil needs.5
We believe that, as the price of oil falls, India’s economic growth prospects—and by extension, equity market performance—may improve.
Historical Study: 3-Month 20% Brent Oil Price Declines and SENSEX Performance
The table shows price declines of at least 20% over a three-month period in the price of Brent , since the liberalization of India’s equity markets, and the corresponding three-month performance of the BSE SENSEX.
• Eleven Declines of 20% of More: Since India’s equity markets liberalized in 1991,6 there have been 11 three-month periods where the price of Brent oil has dropped by 20% or more. On eight of these occasions, the following three-month period for the BSE SENSEX delivered a positive return. The average return of all 11 periods was nearly 17%.
• Since August 13, 2014, Brent Oil Has Dropped More Than 25%: While we can never know what the future will bring, we can indicate the historical relationship that India’s equity markets have had with the price of Brent oil. India’s equities could therefore warrant a closer look.
Quantifying the Connections between India & Oil Prices
• Oil Prices to India’s Gross Domestic Product (GDP): A variety of studies have attempted to identify a predictive relationship between the price of oil and the rate of India’s GDP growth. One recent study indicates that, for every $10 drop in the price of a barrel of oil, India’s GDP increases by 0.1%7. While it’s difficult to determine a cause with that degree of precision for the GDP growth rate of an emerging market economy, given that India imports an average of about 2.6 million barrels of oil per day8, the savings can certainly be substantial when oil prices drop.
• Oil Prices to India’s Inflation Rate: Among emerging markets, India is known for stubbornly high inflation. At the beginning of 2014, the year-over-year change in India’s consumer price index was about 10%.9 As of the end of September, this measure was below 6.5%10 —a significant decrease. India imports more than 70% of the oil that it needs, and oil has a 9.5% weight in India’s CPI.11
Conclusion: A Lower Oil Price Helps India Manage Its Twin Deficits
While all of the relationships we’ve outlined between India and the price of Brent oil are certainly important, the most important could very well have to do with India’s “twin deficits.” India is known for having a significant current account deficit, which stems largely from its need to import oil. India also is known for having a particularly stubborn fiscal deficit, which stems largely from its need to subsidize fuel prices for its citizens.
A lower price of oil can mitigate both of these issues, thereby allowing Prime Minister Modi’s government greater flexibility to pursue other important reforms.
1Source for intro paragraph: Bloomberg, with data through 11/13/14.
2Source: Bloomberg; period measured is 12/31/13 to 11/13/14.
3Refers to MSCI Emerging Markets Index; performance measured from 12/31/13 to 11/13/14.
4Source: “India Analysis Report,” U.S. Energy Information Administration, 7/26/14.
5Source: Nidhi Verma, “India Ends Diesel Controls, Raises Gas Prices,” Reuters, 10/18/14.
6Source: Jyotivardhan Jaipuria, et al., “Falling Crude Prices = Good Days Ahead,” Bank of America Merrill Lynch, 10/20/14.
7Source: N. Madhavan, “Are Low Crude Oil Prices Here to Stay?” Forbes India, 11/3/14.
8Source: “The Future of the Indian Rupee Is Tied to Oil Imports,” Knowledge @ Wharton, 11/15/14.
9Source: Bloomberg, as of 12/31/13.
10Source: Bloomberg, as of 9/30/14.
11Source: “The Emerging Markets Weekly: Summer Smog,” Barclays, 7/17/14.
Important Risks Related to this Article
Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance.
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.
Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.
Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor ALPS Distributors, Inc., or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
Jonathan Steinberg, Jeremy J. Siegel, Luciano Siracusano III, Jeremy Schwartz, David Abner, Rick Harper, Sean Kelly, Christopher Gannatti, Bradley Krom, Tripp Zimmerman, Eswarie Subrahmanyam S. Balan, Zachary Hascoe, and Anita Rausch are registered representatives of ALPS Distributors, Inc.
WisdomTree Funds are distributed by ALPS Distributors, Inc.
You cannot invest directly in an index.