INVESTMENT STRATEGY ---- OIL BELOW $60

UPDATE 18-12-2014
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Investment Strategy- Oil below $60

 

•      A structural shift in global crude oil prices would lead to a transfer of wealth from the oil producers/suppliers to the oil consumers/importers, which should lead to a boost in consumption in oil importing nations. It is estimated that, a ~$40-a-barrel decline in prices will lead to a massive transfer of $1tn/year of wealth from producers to consumers. It is also likely to boost global GDP, as the propensity to consume of an oil importer is greater than the propensity of the oil producer to spend.

•      Oil importers like European Union, Japan, China, India and even the United States (to some extent), are far more relevant for global financial markets than large oil producing nations like Venezuela, Russia, Iran, Saudi Arabia, etc. In India’s context, the benefits of decline in oil prices are far more relevant (and immediate) than the positives flowing out of a change in government @ the centre. This will translate much more quickly into improved earnings and hence an investment into equities is strongly warranted.

•      B2C businesses with strong brands and crude oil derivatives as raw material and certain B2B businesses which are energy intensive, would benefit from lower coal and diesel prices. It must however be noted that B2B businesses do not enjoy full pass through from their clients, because of relative lack of pricing power.

•      We believe falling crude prices shall contain inflation, fiscal and current account deficit and will help repair the Indian Economy. The  interest rates have begun to trend south with G-sec yields and short term rates (CD/CP rates) falling by ~70 bps post Q2FY15. This will benefit the Financials, especially the wholesale borrowers by way of lower cost of funds leading to higher NIMs and profitability.

 

Commodity prices plunge…Inflation within comfort

zone...interest rates trending down
Investment ideas

1)     Pidilite 367

2)     Kansai Nerolac 1935

3)     Astral Poly 392

4)     Shriram Transport 1085

5)     Orient Cement 149

6)     Bank of India 278

7)     Yes Bank 688.95

 

Note: All the above companies are likely to deliver returns of 15-20% over next 6-12 months.

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