InvestorQ : Why has Credit Suisse downgraded Indian equities? Is it because of crude oil prices?
Mary Joseph made post

Why has Credit Suisse downgraded Indian equities? Is it because of crude oil prices?

Arusha Ray answered.
2 months ago

In a way, you are right. It is in the aftermath of the oil price rally that Credit Suisse went ahead and downgraded Indian equities from Overweight to Underweight. A few months back when the likes of Goldman Sachs and Morgan Stanley were downgrading India, Credit Suisse had maintained India at overweight at that point. Underweight means, Credit Suisse is telling clients to take India exposure less than what the model portfolio recommends.

That is not surprising because the Russia war has worsened the situation for India. Crude prices are already sharply higher. In fact, crude has rallied 88% between the start of December 2021 and the start of February 2022. Most of the pressure has come from the Russia Ukraine war and more importantly the fear of sanctions being imposed on Russia. After all, Russia accounts for 8% of the global supply of oil and holds the key.

While Credit Suisse is negative on the short term, it sees no structural issues with the Indian market. It continues to believe that that India has strong structural prospects and EPS momentum. Hence, at some point in the future, the brokerage will look for opportunities to re-enter the market. However, this downgrade is widespread as Credit Suisse is not only cautious on India but also on South Korea and Thailand.

While South Korea also depends heavily on oil imports, Thailand relies heavily on European and Russian tourism. At the same time, Credit Suisse upgraded Malaysia due to positive commodity price impact. It also upgraded China and has gone to the extent of suggesting that India surplus should be transferred to China. One assumption here is that the high oil prices will last longer than expected, but that may not really be the case.

If you take a broader perspective, the concerns in India are not just about oil but also about fiscal management. In another report, Kotak Institutional Equities has pointed to the fiscal risk for the Indian economy. It has highlighted that if oil stays above $120/bbl it could add fiscal deficit to the tune of 1.9% of GDP. Indian government has to make some real hard choices because either the budget goes for a toss or inflation goes out of control.