Surge In Crude Oil Would Impact Global Trade & Inflation In The Domestic Market Says Report

The equity market had a difficult day on February 24th, as Russia's confirmation of a military strike in Ukraine led investors to face concerns. The escalating violence between Russia and Ukraine has not only made the market exceedingly volatile, but they have also caused crude oil to leap beyond the $100/bbl level on Thursday. Not only that, but Brent Crude climbed 7% on Monday, reaching $105 a barrel for the first time since August 2014, amid the current crisis.

Based on the current development, this would be a negative factor for global trade and pose a downside risk to global economic growth. If strict sanctions are imposed on Russia by the US, it would make it difficult for Russia to export oil to the global markets which will ignite a further rally in crude prices, said Axis Securities in a report.

According to a report by Axis Securities, "Such a scenario will pose challenges to the oil-importing countries, especially India, to maintain the trade deficit and the foreign exchange reserve. The rise in crude prices could delay the cool-off in the inflation in the domestic market which was earlier expected to moderate in the second half of 2022. This would further increase raw material prices, which in turn, would intensify margin pressure the Indian corporates are currently facing."

As per Axis Securities "Ukraine tension, the market is expected to refocus on earlier key events such as the inflation and central banks' view on the number of rate hikes in the current calendar year. The FED stance in the upcoming FOMC meeting would be the deciding factor for the market direction over the near term. Given the present context, Oil will be the dominating factor in the FED's analysis of the prevailing situation. On the possibility of a cut in global growth, the FED may slow the pace of rate hiking."

The brokerage has also claimed that "But we cannot rule out the possibility of an aggressive FED stance if it foresees a sharper pick-up in inflation. The wider view is that central banks' first focus will be more on controlling the inflationary effects rather than the growth effects. We believe the present macroeconomic developments are leading to volatility in all major asset classes including Equity, Debt, currency and Gold and the volatility is here to stay for some time before it concludes in a concrete direction."

Based on the above scenario, Axis Securities has picked stocks like Large caps: TCS, Vedanta, Coal India, SAIL, and SBI Midcaps: Oil India, Canara bank, Dalmia Bharat, Persistent, Chola Investment & Finance Smallcaps: Finolex Industries, Birla Soft, Chambal Fertilizer, Redington India, Gujarat Narmada valley fertiliser.

Investors should exercise caution and avoid jumping in and out of the market, since the volatile nature of the market is only for the short and medium-term, and exiting at any moment in time may result in missing long-term compounding.