Higher global oil prices has prompted Credit Suisse , a leading foreign brokerage, to “ tactically” downgrade India’s position in its APAC model portfolio to ‘Underweight’ from ‘Overweight’. Even as it cut India’s position, Credit Suisse said that it still likes the country (India) structurally and would look to take it back to ‘Overweight’ if oil prices normalised. 

While resorting to a tactical downgrade of India, Credit Suisse Research Analysts Dan Fineman and Kin Nang Chik have in their latest Asia Pacific Research Report upgraded China and Australia to “overweight”.

“We use the funds freed from India to raise China from Market weight to Overweight”, said the report.

Firm oil prices to stay longer

These tactical changes to its APAC model portfolio has been undertaken to reflect the likelihood that oil pricing stays higher for longer than it had previously anticipated.

The latest move to downgrade India comes at a time when the unabated selling of equities across the globe due to the Ukraine-Russia conflict continued to weigh on the Indian equity markets. The benchmark indices have fallen nearly 16 per cent from record highs but the fall in individual stocks is much higher.

The prospect of a ban on oil imports from Russia has sent crude prices soaring in recent days and has fuelled concerns about rising inflation. Higher oil prices hurt the current account, add to inflationary pressures and increase sensitivity to Fed rate hikes. If Brent crude remained at $120 per barrel, India’s current account would weaken by almost 3 percentage points of GDP, the report highlighted. The market’s big price/earnings premium magnifies the risks, it added. A weaker current account could magnify a previously diminishing vulnerability to Fed rate hikes and global bond yields.

Old bugbear

Credit Suisse report noted that inflation— another old bugbear—also becomes more worrisome in the Indian context with higher oil prices. Over the past year, headline inflation has risen to levels not seen since 2014. Credit Suisse’s India strategist Neelkanth Mishra has calculated that if Brent stayed above $ 120 per barrel for a year, it could add 100 basis points to inflation and subtract 2.5-3 percentage points from GDP.

Credit Suisse report has at the same time highlighted India’s positive positioning in credit and property cycles. After a decade of downturn, the property sector is set for an upcycle. “We still like India’s structural prospects. We think that recent reforms are improving export competitiveness and like the country’s strong demographics”, the report added.