Sensex gives 24 % Returns within Six Months of an Oil Shock

According to the Morgan Stanley report published in early 2011,Sensex gave over 24 per cent returns on an average within six months of an oil shock with an exception of the 1990 oil event. The Morgan Stanley report came as a surprise in the backdrop of equity market experts the negative impact of oil shocks on markets.

 The report highlighted that out of the six oil supply shocks over the past three decades, only the Iraq war of 1990 had left Indian equities in the red six months after the shock. The 1990 oil shock pushed India into a balance of payment (BoP) crisis. Besides this one oil crisis, in all the other five oil crises’ the Sensex has risen 24 per cent on an average in the six months after an oil shock. It was also pointed that Indian equities do not always correlate negatively with oil.
As per the report oil price change in the past had very little explanatory power on forward Indian equity returns.

To be pointed out in contradiction to the report is that the Indian equity market has been one of the worst performers among the world markets over the last two months. Experts are of the opinion that the poor show is likely to continue.  Contradictory to the Morgan Stanley report, analysts say that one of the main concerns which is hurting market sentiments is the rising crude prices.

The report in conclusion mentioned that sharp rise in oil is always a tail risk for India. However the report, given the equity valuations considers the current period as a good time for stock picking with a 12-month view.