Credit Suisse downgrades Indian equities to ‘underweight’ on rising crude oil prices

Swiss investment bank Credit Suisse has iterated a bearish forecast for Indian equities and cut its rating to 'Underweight' from 'Overweight' owing to a spike in global crude oil prices.

The global brokerage firm termed the downgrade as tactical and said it would look for opportunities to re-enter the Indian market. In the meantime, the funds released after booking profits in India would be used to invest in the Chinese equities market.

“China’s energy import bill is moderate. The closed capital account insulates it from [US] Fed rate hikes and high-frequency indicators point to macro stabilization… China has historically acted as a safe haven in risk-off trades,” said Dan Fineman, who serves as co-head of equity strategy at Credit Suisse Asia Pacific Securities Research division.

Credit Suisse had upgraded China to 'Overweight' in January from 'Market Weight' rating.

“Oil hurts (India’s) current account and adds indefinite pressure besides increasing sensitivity to United States Federal Reserve rate hikes,” said Fineman in a note to clients, adding that India remained most vulnerable to higher oil prices, along with the Philippines.

On Monday, Brent crude oil futures contract for May delivery surged to $139.13 a barrel — its highest level since 2008, while West Texas Intermediate (WTI) oil futures for April delivery rose to $126.28 a barrel.

Crude oil prices have been inching toward record levels in recent weeks, especially the last few days on prospects of the US and European allies banning oil imports from Russia that would drastically curtail supplies from the market.

Higher crude oil prices have a domino effect on inflation and the economy’s other metrics such as current account deficit, production and transport costs, and interest rates among others.

Interestingly, in a television interview 10 days ago, Fineman had broadly painted a positive outlook on the Indian equities market but remained cautious owing to the developments in Ukraine and its impact on crude oil prices that would hurt India's economy, and therefore the stock markets.

In its latest communique to clients, it maintained that India remained among its favoured investment destinations due to positive revisions in earnings per share (EPS) and position in credit and property cycles.

"We are expecting big GDP upgrades, big EPS upgrades. You have got a property sector that is on the cusp, potentially of a multi-year rally. So, for now, we are positive on India but we have to say that we have to be watching events and particularly what happens with oil prices," said Fineman.