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• Crude Oil surges. Crude oil prices have surged to near-term highs. J.P.
Morgan Global Commodities Research forecasts that the strength could
continue. They expect crude oil prices on a spot basis to breach past
US$100/bbl in 1H 2011 and to US$120 / bbl by end 2012.
• Rising crude oil prices are negative for the economy at large. India
imports nearly 70% of its crude oil requirement. The government has
typically been reluctant to pass on the volatility in global prices to
consumers. Consequently, rising crude oil prices have a meaningful
implication on inflation, the fiscal and current account deficits and hence
on interest rates and the currency. Global crude oil at US$90 / bbl
implies a total subsidy burden of US$19 bn and crude oil at US$100 bbl
implies a subsidy burden of US$26 bn.
• Indian equities, however, rally with crude oil prices, as a result of
global ‘risk on/off’ trade. But a significant / sustained rise does impact
equities performance with a lag - both in absolute and relative terms.
• Sectoral performance. Our correlation analysis of sectoral performance
vs. crude oil prices over the 15 years suggests that global cyclicals tend
to outperform during a phase of rising crude oil prices, while local
consumption and rate sensitive sectors tend to underperform.
• J.P. Morgan India Portfolio. Our model portfolio is reasonably well
positioned for a rise in oil prices, as we are, a) overweight the investment
cycle vs. the consumption cycle b) prefer private sector banks to the SoE
banks c) prefer private E&P companies to the state owned oil companies.
Our underweight stance on Materials would however be at risk.
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