The oil market faces significantly greater pressure this time around as Chinese demand returns and flows through the Strait of Hormuz remain severely disrupted, according to Bhanu Baweja, Chief Global Strategist at UBS Investment Bank. As reported by Moneycontrol, Baweja noted that the shutdown of the Strait of Hormuz was a major event — it had not even happened during the Iran-Iraq war in the 1980s — but crude prices did not sustain the kind of surge many had feared, failing to remain at levels such as $120, $150 or $200 a barrel. The market's response earlier this year may have given investors a false sense of security, with 14 million barrels a day at risk as only about one-third of the typical 20.5 million barrels a day of crude and products transit the Strait of Hormuz, with Baweja estimating only about 6 million barrels a day currently making its way through.
Indian equities could remain under pressure for another one or two quarters as high crude prices, elevated US bond yields, geopolitical risks and continued supply of shares weigh on investor sentiment, according to Mickey Doshi, India Country Head at UBS India. As reported by CNBC TV18, Doshi noted that the current market mood is not overly optimistic, stating he's been in the market for three decades and has seen similar cycles in the past. The combination of geopolitical risks, oil prices and the supply of paper remains a concern, even as the market continues to absorb new share supply. Recent market data shows this outlook is materializing, with the NSE Nifty 50 Index falling over 10% year-to-date, weighed down by higher energy costs, a softer rupee, and rising global yields, even as corporate earnings start to rebound.
Foreign institutional investors are growing more comfortable backing individual, bottom-up stock ideas in India, even as crude oil prices remain their biggest source of anxiety about the market, according to Gautam Chhaochharia, Head of Global Markets at UBS India. Speaking from the sidelines of the UBS investment conference, Chhaochharia said foreign participation at this year's event was noticeably higher than last year. He noted that clients have been very reassured by what they saw over the last few months about India's resilient macro and earnings, even as they continue to track how the West Asia situation affects oil prices and, in turn, India's economy. However, that reassurance hasn't yet translated into large capital inflows, with Chhaochharia stating that foreigners are not yet willing to jump in and deploy large capital, but definitely looking for bottom-up ideas. Smaller companies at the conference have drawn strong investor attention, with meeting schedules filling up.
Financials remain a core area of engagement, partly because investors are reviewing existing holdings and partly due to a pickup in credit growth, according to Chhaochharia. However, he flagged a shift at the margin: investors are now engaging more with the broader industrials, metals, and utilities space than they have historically, alongside longstanding interest in areas like quick commerce. For investors looking beyond the consensus trades, he named power and metals as potential dark horses, with UBS's analysts also flagging consumer staples as worth watching. On the artificial intelligence trade, he said worries that India lacks a direct AI beneficiary have softened, with investors instead looking at ancillary plays such as power, supply chains, and companies positioned to adopt AI.
The oil supply crisis extends beyond fuel prices to create broader inflationary pressures, with higher naphtha and fertiliser costs eventually feeding into food prices, according to Baweja. As reported by Moneycontrol, he noted that the outlook for winter sowing will be important, particularly over the November-to-February period, alongside the risks associated with El Nino. While summer sowing has been "absolutely fine," the next season will need to be watched closely. Baweja sees the system as increasingly loaded with inflationary pressures, even though he does not expect a significant wave of wage-driven or core inflation. For developing economies such as India, the distinction between core and non-core inflation is less useful because food and energy make up such a large part of the overall consumption basket, meaning higher prices can feed into inflation expectations and add another layer of risk for the economy and markets.
