US Midterms Could Slash Crude Prices, Boost India's Stability: Kotak
Kotak Institutional Equities suggests US midterm results could lower crude oil prices and improve India's macroeconomic stability.
The outcome of the US midterm elections could serve as a catalyst for significant improvement in India's macroeconomic stability, primarily by easing the pressure of crude oil prices. This insight comes from a detailed report by Kotak Institutional Equities, which suggests that the political shift in the US may lead to more stable geopolitics and a more balanced global supply-demand scenario for energy.
The US Election Pulse and Global Oil
According to the report, the US midterm results were a clear reflection of voter frustration regarding inflation and the escalating cost of living. Economic anxieties dominated opinion polls, with affordability becoming the primary concern for the American electorate.
Kotak pointed out that high inflation has been largely driven by elevated oil prices, which were a direct fallout of the conflict between Iran and the US. The report notes that while the unemployment rate in the US has remained stable, real wages have stagnated, and non-farm payroll additions have shown uneven patterns.
Impact on India's Economy
For India, a country heavily dependent on energy imports, any dip in global crude prices is a major win. Kotak expects India's macroeconomic position to strengthen over the coming months as oil prices return to normal levels.
The report highlights two primary benefits expected from the US midterm outcome:
- Enhanced Geopolitical Stability: A clearer political direction in the US could lead to more predictable international relations.
- Reduced Crude Costs: A shift in dynamics may help lower the cost of oil, easing the inflationary burden on the Indian economy.
Currently, the market sees Brent crude trading around USD 99.82 per barrel, while crude oil sits at approximately USD 91.52 per barrel. Interestingly, the report mentions that while Iranian oil exports have plummeted due to US restrictions on shipments through strategic waterways, overall supplies from the Middle East have improved despite Iran's blockade of the Strait of Hormuz.
Corporate Earnings Fueling Investor Confidence
Beyond the geopolitical lens, the report brings positive news for the domestic equity market. Corporate earnings for Q2FY27 are expected to provide a strong cushion for investors. Data shows that Nifty 50 companies recorded a 19 per cent year-on-year increase in net profits during this period, with a similar growth trajectory seen in EBITDA.
Even after adjusting for the oil, gas, and consumable fuels sector, the positive trend in net profits and EBITDA remains intact. Kotak is optimistic about the future, projecting that net profits for the Nifty-50 Index will grow by 20% for both FY2027E and FY2028E.
Market Valuations and Risk
From an investment perspective, Kotak views the current risk-reward balance as "favourable." Most market segments are trading at valuations that are considered fair to attractive, despite a recent rebound in prices. However, the report does caution that certain investment-related sectors are still trading at elevated valuations.
In summary, the combination of potential geopolitical stability following the US elections and robust corporate earnings is expected to provide much-needed clarity and comfort for India's economic outlook and the domestic stock market.