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BLACK MONDAY: Corona and Crude Crush and Crash Markets 

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BLACK MONDAY: Corona and Crude Crush and Crash Markets 

BLACK MONDAY

Corona and Crude Crush and Crash Markets 

Markets freaked out yesterday. It was a BLACK Monday with record RED splashed across Global Financial Markets . Sensex plunged a record 1942 points to close down 5.17% at 35635 recovering a little from a higher intraday fall of 2467 points .The Dow too had a free fall closing down 2014 points and 7.79% at 23851

                                          moneycontrol.com

In a shock move at the weekend, Saudi Arabia triggered a Oil Price war to capture market share by significantly lowering Crude Oil Price by $ 6 to $ 8 for April 2020 deliveries after Russia refused on Friday at the OPEC Meeting in Vienna to agree for production cuts to support Oil Prices at US $ 50/barrel and counter the lower demand, especially from China, on account of the corona virus impact. On Friday itself Brent dropped to US $ 45/barrel plunging from near US $ 53/barrel to under US $ 32/barrel inside a week before recovering to over US $ 34/barrel. Not since January 17, 1991 Gulf War Times have we witnessed such a shock

The Corona Virus had already infected the Global Markets from the beginning of 2020 and is now on the verge of being declared pandemic by WHO as it spreads across the Globe affecting 115 countries and 114500 people with over 4000 deaths till date .Sensex from 41349 on January 1, 2020 had already corrected 9.1 % to 37577 on Friday, March 6, 2020 

 

This is the Effect of BLACK MONDAY yesterday as panic volatility hit both Stocks & Bonds on the Oil Shock with a melt down on sell off in risk assets Stocks and a move to safer havens of US Treasuries causing yields to drop violently in the Treasuries as demand for them surged as did their price     

 

Plunging  Monday

March 9,2020

% plunge from a week ago Friday

March 6,2020

Monday

March 2,2020

Oil Brent in  US $/Barrel 34.36 after dropping to32   33.8 45.27 51.90
Oil WTI in US $/Barrel 31.13 after dropping to 28 33.4 41.28 46.75
Sensex 35364 9.1 37614 38911
Dow Industrials  23851 10.7 25865 26703
Rs/US $ 74.11 1.8 74.12 72.82
Move to Safe Havens  % from a week ago
24k 10 gms Gold in Rs  44361 5.5 44041 42041
10 Yr US Treasury % Yield 0.57 after a low of 0.318 48 0.74 1.1
30 Yr US Treasury % Yield 1.02 after a low of 0.702 30 1.09 1.46

     Jeena Scriptech Research

 

Just last month the 10 Year US Treasury quoted at 1.5% yield and in 2018 was available at near 3% yield

 

Saudi Arabia creates Turm-Oil 

Saudi Arabia oil production costs are one of the lowest in the world 

                                    statista

 

With low production cost, Saudi Arabia can withstand lower oil prices for a longer time before any real threat to its oil dependent economy. Here are some economy pointers:

  • GDP in 2019 was US $ 780 billion
  • Fx Reserves at September 2019 were US $ 500 billion
  • Exports are US $ 221 Billion largely from the export of Oil 
  • Oil Reserves are second largest after Venezuela at 260 billion barrels
  • Annual Production is 3.5 billion barrels   

 

Yet low Oil Prices can challenge the Vision 2030 endeavour of Saudi Arabia to wean dependency away from Oil Exports as even a US $ 20 drop per barrel would mean a loss of  US $ 70 Billion in Revenues. Nearly 90 % of Budget Revenues are from the Petroleum Sector. 

 

Thus lower Oil Prices will affect Saudi Arabia too in the longer run. So why this shock move to drop prices to capture market share? We see this as a twin effect power play to:

  1. Decimate US Shale Producers who have debt on their balance sheets and fracking costs being high cannot survive such low oil prices for long
  2. Drive sworn foe Iran, another oil export dependent nation, further into economic despair as it battles US and other sanctions          

 

INDIA benefits from lower Oil Prices

India clearly will benefit from lower Oil prices with a prayer that the Rupee does not depreciate significantly 

India is an Oil intense nation. According to the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum, India’s Oil Import Dependence has remained at over 80% in the past four years peaking at 83.7% in FY 19 with domestic Oil Output dropping to 34.2 mmtpa

Here’s India’s Oil Import Bill from FY 14 to FY 20 with the latter annualized and assumed based on 10 months data till January 2020 .The FY 20 Oil Basket will be lower than US $ 63.50 as taken as 2020 has seen Oil Prices drop. Thus our Import Bill for FY 20 should work out even lower than the assumed US $ 105.25 Billion     

 

India’s Oil Imports from FY 14 to FY 20

Year 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 

(10 Months)

2019-20 (Full Year assumed)
Imports 

($ M)

142,962 112,744 63,972 70,196 87,803 111,915 87,706 105,247
Imports 

(Rs Cr)

864,875 687,416 416,579 470,159 566,450 783,183 617,344 740,813
MMT 189 189 203 214 220 226 188 226
$/Barrel Basket 105.52 84.16 46.17 47.56 56.43 69.88 63.5 63.50

Source: PPAC, Jeena Scriptech Research

 

Assuming we continue to import 226 mmtpa which is equivalent to @ 1660 m barrels our Import Bill and Savings in US $ Million at various levels of Oil Prices is shown below

 

$/Barrel Basket 20 25 30 35 40 45 50
Imports  33,205 41,506 49,807 58,108 66,409 74,710 83,012
FY 20 Import at US $ 63.50/barrel    105,247 105,247 105,247 105,247 105,247 105,247 105,247
Savings 72,042 63,741 55,440 47,139 38,838 30,537 22,235

 Jeena Scriptech Research

 

India will save a significant US $ 22 Billion to US $ 55 Billion should Oil Prices remain in the lower US $ 30/barrel to US 50/barrel in FY 21.We remain one of the world’s largest importers of Oil with Iraq & Saudi Arabia being our major sources .India hopes to significantly reduce Oil import dependency by 2030 in the Energy Transition   

 

This Savings will translate into a lower Fiscal Deficit

2019-2020 2020-2021
Revised Estimate Budget Estimate
Budget Date 1/2/2020 1/2/2020
GDP (Rs Crs) 2,04,42,233 2,24,89,420
Nominal GDP Growth Rate %  7.5 10
Fiscal Deficit (Rs Crs) 7,66,846 7,96,337
Deficit / GDP % 3.8 3.5
Fiscal Deficit  (US $ Billion at US $=Rs 74.11) 107
Savings( US $ Billion) in Oil Imports at Oil Basket US $ 35/barrel from above table  (47)
Adjusted Fiscal Deficit (US $ Billion) 60
Adjusted Fiscal Deficit as a % of GDP   2

Our Rupee has depreciated really worryingly in the past week from levels below Rs 72 to the US $  to  Rs 74.11.With a prayer that such depreciation momentum is a one-off ,our Fiscal Deficit for FY 21 should drop to just 2% of the GDP not considering any further adjustments/revisions that may arise. One can expect the BJP led NDA Government to take credit for this just like the Congress led UPA Government has done in the past    

 

As to why India only marginally passes on the benefit to Indian Consumers on Oil Price drops is a matter for debate for some other day. Suffice to say India uses such bonanza to prop up the economy, not adjust Government Projects expenditure downwards to cut deficit like forced in FY 20 revised estimates and facilitate lower government borrowings…but does it do so efficiently? Well, let’s debate that some other day and thus don’t expect the price of petrol to halve from Rs 80/litre even if the Oil Import Basket halves per barrel 

 

India’s FX Reserves are US $ 481.5 Billion as on February 28, 2020.Expect these to cross for half a trillion Dollars in FY 21 boosted in part by a lower Oil Import Bill

 

Markets going forward   

Stocks ~ Sensex & Dow will attempt a rebound after such a huge fall yesterday .Yet the sentiment and momentum should remain south with liquidity drying up and indices should seek further lower levels in 2020 as global recession kicks in and monies move towards safer havens and the discipline of asset allocation assumes its rightful importance as a survival tool .FPIs have withdrawn US $ 1.7 Billion in Equity in just seven trading days on Indian bourses in March 2020 as of yesterday. Today India is closed for the Holi festival 

 

We don’t see any quick economic recovery in 2020 as we expect Oil Prices to remain at lower levels for this year pushing Oil Exporting Nations like Russia, Iran, South Africa, Nigeria, USA and Canada into further economic stress. 

 

India, despite a year of lower interest rates and oil prices in the offing, is not in an immediate position to effectively leverage and benefit in a sustained manner as it will continue to be challenged for demand of products and services in both domestic and global markets and cross sectors. This will continue to stress exports and manufacturing, more so as the Corona Virus Impact plays out over 2020. As we have reiterated for several months now and even in our ‘Disconnect’ Standpoint of last month that there was a significant and visible disconnect between rising Indices and slowing GDP Growth on the strength of high liquidity. This disconnect is now rapidly reversing on the twin shocks of the corona virus and plunging crude prices. This will introduce some sanity back on Valuations on the bourses and give some great opportunities in value buying for the long term. Of course there will always be a few selections that will outperform even as indices correct 

 

China, from where the Corona Virus has originated, continues to suffer from its consequences internally with lockdowns and shutdowns continuing. It being the second largest world economy will continue to affect Global Trade in 2020

 

In a Presidential Election Year, USA is facing potential recession which the optimists are opining will be short lived if it does envelope the nation. USA will be forced to lower domestic taxes and possible we may even see a Quantitative Easing IV being introduced to provide liquidity in their economy as the Shale Industry again gets destroyed on lower oil prices and unemployment woes re-surface. 

 

Geo Political Conflicts will intensify across global hotspots in the Middle East and Asia as economic stress pushes Nations to the wall.

Gold ~ In the past few years it has been a ‘no brainer’ that Gold, despite not being Warren Buffett’s favorite investment asset as it’s not productive, would be the savior for capital protection .You must have at least 10% allocation in your Portfolio in Gold .Two Years ago in March 2018 Gold was at Rs 30000 for 24k 10 gms .It’s pushing towards Rs 45000 now giving a near 50% return in two years as Investors plough into safety in nervous and uncertain and worrying times. Gold will continue this northward momentum, albeit at a slower rate than past two years

 

US Bonds & Negative Interest Rate Securities and Deposits ~ Smart Monies are moving to safer havens in an uncertain world. When you tie in a really long term 30 year US Treasury for just 1% pa yield or even pay the Banks to keep your Monies you really are saying “ I think the Bear Markets are here to last beyond my death and I don’t wish to bear any more risk ” .Given what we see, live and breathe right now, we cannot argue with your thinking that protection of capital is more paramount than capital growth and that return of principal is more important than return on principal  ~ this reality will continue for long

 

Conclusion

It’s a tough investment climate out there~Instead of earning ‘alpha’ from Stocks you may be sucking ‘lemons’ and post tax yields from Bonds/Bank Deposits may not cover  inflation and it’s a prolonged real estate slump~then what should you do to make real gains post tax and inflation while protecting capital and staying true to your risk profile ? 

We continue to reiterate the discipline of Asset Allocation based on Risk Profile. In our measured view, and as is often quoted, Rome was not built in a day while Nagasaki and Hiroshima fell in a day, you must invest in Direct Equity for the long term and every Asset Allocation exercise must have a Direct Equity component with Core and Non Core weightage and sound selection on various basis in sync with your risk profile  

Wishing you a Happy Holi and the colour green rather than red in your equity portfolio     

 

Disclosure & Disclaimer

Jeena Scriptech Alpha Advisors Pvt Ltd (JSAAPL) is a SEBI Registered Entity offering Fundamental Direct Equity Research Analysis, Equity Portfolio Advisory, Training & Mentoring Services in Capital Markets

 

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