Relief from petrol, diesel price hikes? Oil may fall to $70

Crude oil price suddenly cracked over 6% in just a matter of three trading days in the global markets after media indicated that Saudi Arabia and Russia could increase the oil supply. Only a couple of weeks ago some stalwarts cautioned that the oil price could hit $100 a barrel. Oil cannot boil continuously and it is in their own interest, the oil producers need to keep oil price around $70 a barrel. Nowadays the demand for oil would be highly sensitive to the prices as many emerging economies have already removed subsidy element in fuel prices to a large extent. Therefore, the very high price will kill the demand for oil, which in turn, would bring back deflationary pressures for the global economy and therefore, finally major fall in oil prices.

Fundamentally speaking, oil might fall back to $70 a barrel in the short term which would give a significant relief for both economy and the markets. However, over Rs 45,000 crore of the market cap of government-owned oil and gas companies got knocked off despite the government’s bold decision to continue with the reform measure of market-driven fuel prices. However, some of these PSU stocks rebounded as high as 14% within a few days those panicked on adverse market perceptions lost the opportunity of this rebound.

A ‘technology company’, which has been spending just about ‘1% of revenue on the employee benefits expenses’ eroded the market cap by over 92% from its peak within a period of four months its wealth destruction continues on the markets. Another mid-cap company, operating in steadily growing consumer-oriented business, saw its market cap falling 20% in a single day after the news of auditor resigning from the company. Despite operating in consistently growing consumer business, the stock is down over 33% from its 52-week high!

In some cases, investors rewarded the stocks with solid double-digit gains immediately after the announcement of bonus issues. Does issue of bonus shares change the fundamentals favourably? Certainly not, except reducing arithmetically proportionately earnings and book values on per share basis. Of course, issue of bonus shares regularly creates wealth in the long term provided the profits also grow consistently, outweigh the rate of dilution in the equity base and business growth story remains intact. Otherwise, expansion of equity base through bonus shares doesn’t add any value to the shareholders. More than a decade ago, a company declared 10 shares as bonus shares for every share held, but finally, the stock got suspended from the stock exchanges. A few of these most recent trends indicate growing role of market perceptions and speculations in leading to wealth destructions for the gullible investors. It is ripe time to ponder over these trends and sticking to core fundamentals of stock investments, rather than solely following mass perceptions.

By G Chokkalingam
(The writer is founder and managing director, Equinomics Research and Advisory)