Oil Rise May Keep India Stocks in Check, $4 Billion Manager Says

(Bloomberg) -- While Indian equities have been pinched this year by internal and external concerns including the threat of a global trade war, rising crude oil poses a bigger danger, according to Tata AIA Life Insurance Co.

“Even as we are broadly constructive on Indian equity markets, risks arise from a possibility of a surge in crude oil prices from current levels, as it upsets the nation’s trade balance and stokes inflation,” Harshad Patil, the Mumbai-based company’s chief investment officer said in an interview.

Brent crude has surged nearly 65 percent from its 12-month low, and may climb further on factors including geopolitical tension in the Middle East and Saudi Arabia’s goal of $80 per barrel. Rising crude could cause depreciation of the Indian rupee and hurt investor sentiment, said Patil, who manages 240 billion rupees ($3.7 billion), around 100 billion of which is in equity.

Oil dependent

The key stock gauges in India, which imports about 80 percent of its oil, are little changed this year after rising about 28 percent in 2017. While lower crude prices since 2014 helped the indexes set a series of record highs, stocks have been treading water in 2018 amid concern over global factors such as rising protectionism by the U.S. and China, as well as local issues including additional taxes on stock gains and a bank fraud scandal.

Aside from oil prices, India’s domestic economic concerns have peaked out as gross domestic product growth is picking up and inflation remains muted, according to Patil. He expects corporate earnings to rebound after a few years of sub-par growth, betting on a recovery in rural economies and the government’s thrust on boosting the nation’s infrastructure.

Read more about India’s plan to raise crop prices

“Government steps to increase farm incomes will generate demand in rural India, and the normal monsoon forecast for a third-straight year is only going to make things better,” he said.

Patil expects domestic retail inflows to remain strong and advises using any decline in share prices as a buying opportunity. Tata AIA’s ULIP Multi-Cap Fund and India Consumption Fund are the company’s best-performing funds in the past year, returning 24 percent each, better than 93 percent of their peers.

Here are some of Patil’s key picks:

• Overweight automakers and consumer-goods companies on rising rural incomes.
• Overweight engineering & construction, cement on government infrastructure projects ahead of general elections.
• Expects “robust performance in select banks and non-bank finance companies”; sees recovery in economic activity after disruption caused by new nationwide sales tax.

©2018 Bloomberg L.P.