Trade war may lift OMC fortunes

The trade war between the US and China continues. On last Thursday, the US threatened additional $100 billion in tariffs on Chinese goods and China reverted on Friday that it is “ready to fight back resolutely”.

However, India need not worry much about the intensification of trade wars between China and the US as India perennially posts a deficit in external trade of goods. While India maintains a trade deficit with China, the surplus it generates from the export of goods to the US is not large enough for the US to worry.

Of course, India generates substantial revenues from the export of services (software and IT) to the US. However, any serious move by the US in terms of protectionism on India’s export of services would have a disastrous impact on the country’s current account balance of payments, rupee exchange rate and also on the employment levels.  However, such harsh measures by the US are unlikely on the political ground as any such possible move could bring India and China closer.

On the contrary, rising trade war could actually help in moderating the crude oil prices, which have gone up by over 140% from the 2016-lows due to cartelisation of oil supply by the Opec and also recent recovery in the global growth. Growing protectionism or trade wars would actually moderate the global growth as these measures would ultimately lead to sub-optimal (inefficient) allocation of resources.

Moderation in global growth would bring down oil prices substantially as global crude prices are significantly sensitive even for marginal changes in the annual rate of global GDP growth. That’s why whenever the US initiates and/or China reacts on trade wars, not only the US equity markets but also the global oil prices correct quite significantly.

Stock prices of oil marketing companies (OMCs) have fallen 18% to 23% from their 52-week high, majorly due to the spike in oil prices, though the Sensex has moved down only by about 7% from its peak.

However, any possible further intensification of trade wars could pull down oil prices and therefore, the OMC stocks could emerge as defensive bets in such scenario. Of course, growing trade wars could make all other companies, which use directly oil or oil derivatives as safe bets.

However, the fact that these OMC stocks, after steep fall, trade around single-digit PEs make them relatively safer bets.

The writer is founder and managing director of Equinomics Research & Advisory