The calm before the storm? What Morgan Stanley’s Ridham Desai says about the stock market correction
Despite an oil supply shock, rates, currency and equities appear to be relatively calm, Morgan Stanley’s Ridham Desai said in a note, in which the brokerage analyzed likely reasons to see if it’s It’s a calm before a storm or new market momentum. .
“Supply-limited oil price hikes are bad for India. Indeed, the recent 25% jump in oil prices will increase the current account deficit by 75 basis points and inflation by 100 basis points. on an annualized basis. Historically, India’s relative stock prices against emerging markets (EM) have reacted poorly to oil price increases caused by supply disruptions,” Desai said in the note.
India’s relative performance against emerging markets appears to have deteriorated in recent years. Accordingly, the brokerage offered the following explanations:
Political certainty: India’s political environment is one of the strongest in the world, driving India’s idiosyncratic growth and, more importantly, likely creating a new profit cycle. Rising oil prices are a threat but not strong enough in the context of the political environment.
Decrease in oil intensity in GDP: Oil consumption relative to GDP is at an all-time low and has been steadily declining, especially since 2014.
High relative real policy rates: Monetary policy looks much better placed to manage the inflationary impact of higher oil prices, especially relative to history.
Increasing share of FDI compared to FDI in external balances: India relied mainly on foreign portfolio flows (FPI) to finance its current account deficit. REIT flows tend to react more aggressively to the effect of oil prices on equities and their actions feed into the macro, creating a vicious cycle. However, since 2014, external financing has shifted dramatically towards FDI which is more stable and less sensitive to fluctuations in oil prices.
The above factors likely explain why the rates and currency markets have been relatively stable compared to previous oil shocks. Thus, stocks also reacted less violently.
“Is this change in the impact of oil on equities structural or are the markets assuming that oil prices will reverse quickly or does it take another $10-20 rise in oil prices to make will the stock market falter? We’re not sure but the following days could answer these questions,” added Desai.
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