High crude oil prices are a big worry for the Indian equity markets which have had a not-so-good-year so far, Deutsche Bank (DB) Group said on Monday.
"High global crude prices are a short-term worry for the Indian markets...it is a big macro overhang which can hurt the markets," DB Group's Head of Equities Pratik Gupta told reporters in Mumbai.
Following the political turmoil in the West Asia and African nations, particularly Libya, oil prices have been surging and were in the over USD 100 a barrel range for some weeks.
DB's Head of Research, Abhay Laijawala, said if crude prices reach the USD 120-130 level and continue being there for a sustained period of over three months, there will definitely be an impact on the markets in India, which imports nearly three quarters of its annual crude requirement.
"I cannot say how much would be the impact in numbers, but the markets will be rangebound," he said.
DB Group expects the 30-share BSE Sensex, which closed 263 points down at 18,222 points on Monday, to be at 21,000 points by end-2011. According to the bank, the long-term India story fuelled by domestic consumption remains intact which will boost the markets.
On the impact of the unfolding political situation with a major ally from the coalition at the Centre threatening to pull-out, Gupta said, "investors are used to coalitions for 20 years now. For mature investors, such developments cease to be an issue...nobody is expecting the Government to change."
Indian equities, which were the flavour of the season all through 2010 with foreign investors and attracted USD 29 billion in net inflows, have had a lacklustre performance this year, driven by various factors like oil prices, domestic inflation, rate hikes and political uncertainty because of a rash of scams.
According to reports, the FIIs have already pulled out USD 2 billion from Indian markets. Also, Indian markets are struggling when it comes to delivering returns as compared to their peers in the emerging markets.
India will continue to underperform if oil prices continue being high, Laijawala said, adding the second half of the year should see more funds being allocated to India by investors.
The other major worry which can end up compounding troubles this year is a possible poor monsoon, Gupta said, adding another major data to look out for will be the industrial production numbers.
DB Group feels the valuations are very attractive currently and will be advising its clients to buy into sectors linked to the global recovery like IT services, metals and upstream oil and gas companies like Cairn India, Laijawala said.