Every time crude oil prices have gone up in the past. India in particular has done better. Due to rising crude oil prices all commodity prices are going up and this translates to better profits for the companies that are in the commodities game and this is the reason why we are seeing the market get straighten out in this situation., says Deven R Choksey, MD, KR Choksey Investment managers.

The price of Brent crude is approaching $ 84 a barrel. WTI is approaching $ 80 a barrel. Can this be the spoilsport for the Indian stock markets?
History shows that whenever the prices of crude oil rose, stocks also rose simultaneously, and whenever they fell afterwards, stocks also corrected. If this needs to be validated, the market is unlikely to go down. However, the important aspect would be the economic impact. The economic impact for India in particular is extremely serious due to the high prices of raw materials due to the high costs of energy and crude is responsible for it.

The cost structure of the economy is increasingly being questioned. In my opinion, it’s only a matter of time before the global majors get together and start asking oil-producing countries to start ramping up crude oil production and cooling down prices. Much of the recovery of crude oil in the current system came after April 2020, during which most oil-producing countries cut production.

The demand for crude oil is increasing, but it is not growing at a very high rate. At the same time, due to supply constraints, crude oil prices have remained firm. Global majors would likely rally together, cool crude oil prices and eventually cool other commodity prices. This will likely be the game that happens, but from now on, many companies will experience the higher cost structure, especially in the second half of the year.

Until the first half of the year, most guys would have more inventories on their balance sheets. I guess the real impact of the cost pressure would occur in the second half of the year. Some businesses will need to be watched very carefully at this particular time. So demand might not be affected immediately, but cost pressures would kick in.

How to play this theme on the stock markets? JP Morgan explained that the median return on emerging markets equities was over 19% and also exceeded developed markets.
Yes, and like I said, every time crude oil prices have gone up in the past. India in particular has done better. Due to rising crude oil prices all commodity prices are going up and this translates to better profits for the companies that are in the commodities game and this is the reason why we are seeing the market get straighten out in this situation.

But as I also said, the raw material consuming industry and in particular the energy companies will be affected by the margin. In my opinion, many of these businesses where consumers are seeing symptoms of slowing demand are not out of place.

In this kind of scenario, how do you play it? In my opinion, it is safer to look to companies that are less dependent on a higher cost of electricity. If so, we’re probably relatively better off in a market like this.

But if we play on raw materials, then it will be necessary to be extremely precise and fast in the exchanges of raw materials. In crude oil, upstream activities would remain relatively stronger than downstream activities and gas distribution whose margins are likely to be affected.

What is the logic in buying stocks on the stock market? Is there any interest in buying IEX, MCX?
Currently, a huge amount of transactions are taking place on the trading platform due to the extraordinary situation in which most commodities are traded including utilities and energy commodities. This is the reason why we are seeing the sharp increase in activity on the exchange platform. I wouldn’t say that for this reason alone, one should buy stocks on the stock market.

In my opinion, stocks are still long term games. As we see more financialization of assets, many brokerage firms are likely to perform relatively better, both in terms of volume and the amount of market capitalization or assets they would manage.

So from this point of view, plus the fact that most exchanges are now allowed to trade in different commodities, different securities simultaneously, many of their assets are likely to join the race, including insurance. So, from this point of view, we would like to look at these companies individually.

We may have talked about MCX and IEX, but I think overall you have to look at these particular companies that are present in the market.

Why do you think the Birlas are so keen to keep Vodafone afloat and infuse another Rs 10,000 crore?
That’s a big question and you don’t get a completely convincing answer on this particular topic. Even if the world would say that we need three or four companies in telecommunications, I always ask the question whether these three or four companies would continue to invest simultaneously the amount of money that is necessary?

Look at the case of Bharti. Bharti will have to inject significant money into the infrastructure because we already have the telecommunications part of the infrastructure. The data part of the infrastructure and the applications that go with it will ultimately be the lifeblood of the business. There is a significant deviation from what Jio has achieved.

is last in the rankings and BSNL is nowhere. In such a situation, survival is going to be a very big challenge for these companies. Significant sums will have to be invested because economic models change very quickly. I don’t think we’re going to easily increase ARPU. More business is happening on the data traffic and the data is going to be consumed by the applications for the service on the platforms and this is where Indian companies are lagging behind. It will be interesting to watch the thesis and story of the Birla group or the goal of putting more money into Vodafone Idea.


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