The drop in
crude oil prices has sparked a huge rally in equities across the world and that’s been aided and abetted in India by the return of political stability and hopes that the long-put-off reforms will finally be accelerated. Where can this rally take the markets?
Well, if international oil prices fall to $115 (Rs4,865) a barrel, that’ll take us back to where we were at the beginning of May. On 5 May, when Nymex oil futures opened at $115 a barrel, the Sensex reached a high of 17,735, a level it hasn’t been able to achieve since then. Although it must be noted that high domestic inflation continues to be a worry.
The energy markets have suddenly woken up to the realization that as world growth slows, demand for oil, too, will come down. The International Energy Agency forecasts global oil demand to fall to 1.03 million barrels per day this year, compared with 2.11 million barrels at the beginning of the year. Lehman Brothers Holdings Inc.’s recent research note, Demand Demolition, talks about this large reduction in demand and predicts that “the deteriorating demand picture reinforces our belief that oil prices are approaching a tipping point” with prices expected to average $110 a barrel in the fourth quarter of 2008, and a further decline to a more supportable $90 by the first quarter of 2009. That will certainly help equities.
In India, while domestic oil prices are still way below international levels, the fact remains that lower international prices will mean that fewer oil bonds will need to be issued and both the current account as well as the fiscal deficit will improve—hence, the softening in bond yields and the strengthening of the rupee.
And, although cooling international prices will have little impact on domestic inflation, it will certainly lower headline inflation in the US and provide some relief to the US consumer. (Domestic inflation is expected to remain high on the back of inadequate monsoon in parts of the country.) It will also lessen the probability of the US Federal Reserve having to tighten its monetary policy, which is good for liquidity and should boost sentiment in equity markets.
Any disinvestments pushed through by the government will also help the fiscal situation, taking the pressure off interest rates.
However, the situation now is very different from the Goldilocks scenario that took the Sensex to 21,000 points. That bull market was on the back of high growth and low inflation. Currently, while the cooling off of oil prices may lower global inflation, it’ll be a low-growth, low-inflation environment. But at least it’s better than low growth and high inflation.
Mastek’s FY09 forecast looks ambitious
Mastek Ltd surprised the markets with a rather upbeat guidance that dollar revenues would grow 32% in the year to June 2009. Industry body National Association of Software and Services Companies expects the country’s software and services revenues to grow 21-24% in dollar terms for the year till March 2009.