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    Crude shock for your equity and debt mutual fund investments

    Synopsis

    On Monday, oil prices spiked $12 to trade at $71 a barrel in Asia. This is said to be the biggest advance in Oil prices in 28 years.

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    Crude oil prices surged 19.5 per cent in a day after a drone strike on a Saudi Arabian oil facility. On Monday, oil prices spiked $12 to trade at $71 a barrel in Asia. This is said to be the biggest advance in Oil prices in 28 years. The Indian markets had a negative knee-jerk reaction to the news. The BSE Sensex fell 250 points on spike in oil prices. Fund managers believe that if the tension between Iran and USA persists, crude oil prices might go up, which is a bad news for Indian markets.

    “The early morning sentiments for global equity markets are negative due to the attack on one of the Saudi crude facilities. Indian equities are particularly sensitive to changes in crude prices and USD/INR and these have adversely opened. We do expect incremental pain as the day progresses. Any selling pressure on Nifty 50 index below 10,950 is likely to lead to panic selling,” wrote Arun Kumar, Market Strategist, Reliance Securities.

    Experts believe that any disruption to Saudi supplies will create volatility in the market. Fund managers believe that while the immediate impact was negative, we will have to wait and watch the steps taken by the Saudi government. “It is too early to comment on the future of oil prices, but the knee-jerk reaction has been negative. The comments that have come from Saudi suggest that they are working towards the restoration of partial capacity as early as by the end of the day. If that happens, I believe, crude oil prices should come down,” says Harsha Upadhyaya, Head-equities, Kotak Mutual Fund.

    Upadhyaya believes that the in case crude oil goes to $70-75 per barrel and sustains there, it is negative for our economy. “If there is a sustained rally in oil prices it is going to be bad for India, especially when we are amid a slowdown. Crude oil prices are among the few factors that are working for the Indian markets apart from global liquidity and low interest rates. Given the fact that taxations numbers may miss the targets, this was one factor that was giving government some kind of stimulus,” Upadhyaya says.

    Saudi Arabia's facility generates 5 per cent of the world's crude oil supply. Some market participants believe that if the geo-political tensions increase, the crude oil prices might rally from here. "Crude oil has a bearing on India. It is the single largest imported product by India. If the prices go up, we will face troubles in the economy. All this might lead to an adverse impact on the equity market as well," says Chirag Mehta, fund manager- alternative investments, Quantum Mutual Fund.

    With rising crude oil prices, the yields also inch up because of expectation of inflation, a pause of rate cuts etc. The 10-year G-sec went up to 6.75 per cent on Monday morning. The yields have come to 6.70 per cent by afternoon. Rise in yields have an adverse impact on long duration funds. “The yields have gone up but they haven’t materially inched up. That is only feel good factor at this point. The 10-year bond yield went up to 6.75 per cent in the morning today. It was trading at around 6.68 by afternoon. So, it has been a very sharp recovery,” says Lakshmi Iyer, CIO-debt and co-head product, Kotak Mutual Fund.

    Fund managers believe that the impact on the markets right now is temporary. However, a further escalation in situation in Saudi might lead to equity and well as debt mutual funds facing the brunt. “It is difficult to speak about how the market will react till we have a clear view on the situation. In my view, small and mid cap segments have corrected a lot. We believe that over a period of time, this basket will give you returns. What happens in the interim because of factors is difficult to say,” says Harsha Upadhyaya.

    “If the tension persists, all categories of debt funds will be impacted. Higher yields will have the most impact on the long duration bond funds and gilt funds. As you go down the duration cure, the impact will be less, but it will be there. Movement in yields and interest rates impacts the highest duration the most,” says Lakshmi Iyer.

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