An Expert Explains: Key impact on energy prices; must follow asset allocation basics

Russia-Ukraine conflict: 'No one knows where the bottom is — it will all depend on how the war unfolds, and when it ends. Hence, investors need to follow the basics of asset allocation.'

People watch the stock market index on a display screen on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, Thursday, Feb. 24, 2022. (AP Photo/Rafiq Maqbool)

The key impact of this war for India is higher energy prices. India imports 4 million barrels of oil per day, and if oil prices go up by $10 per barrel, it means an impact of $40 million a day. Inflation remains a concern and it will also impact our current account deficit — and that will lead to further depreciation of the rupee. It will also result in a higher fiscal deficit due to the inability to pass on the increase in the oil subsidy burden due to the rise in oil prices.

Indian markets, which delivered higher returns in comparison to all other markets, have been witnessing profit booking by foreign portfolio investors, and they have pulled nearly Rs 1 lakh crore over the last five months.

An Expert Explains | India's prospects don't change, opportunity for smart investors

Following the correction, if the Indian markets were earlier trading at a premium over their historical valuations, they are now trading near their historical valuations. But no one knows where the bottom is — it will all depend on how the war unfolds, and when it ends. Hence, investors need to follow the basics of asset allocation. If the correction comes, they can look to slowly increase their allocation to equities, and be long-term investors.

One aspect that investors can take comfort in is the fact that over the last few years the capacity of the economy to sustain at higher levels of crude oil prices has gone up. Also, corporate profitability is good, and companies are deleveraged; that should help the markets going forward.

Nilesh Shah is MD, Kotak Mahindra AMC