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Before you fall for falling oil prices
Mon, 19 Jan Pre-Open

If we ask you to mention a single most factor that had wide reaching influences on global economy in the recent times - what would that be? While a lot has happened over the last few months, we believe slump in the oil prices is what majority will vote for. Afterall, it is not a small event. The oil prices have corrected by more than 50% this year. And this crucial commodity has turned economics in favor of oil importing nations such as India, and has made the producers poorer. In fact, in India, apart from Modi Government, it is the decline in oil price that is the major reason behind declining inflation and reforms like diesel price deregulation.

As industry experts believe oil prices to remain low, there is a flood of stocks recommendations - for the sectors and companies likely to gain from falling from prices. Some of the major gainers are expected to be the industries and companies where raw material is used as key input - rubber, lubricants, paints, chemicals, plastic industry and so on. Those who are falling for these are forgetting the lessons from history - that oil price predictions have hardly been predicted correctly.

While declining oil prices will have some positive impact on the margins of the above mentioned sectors in the long term; that can not be the basis of taking investing decisions. What investors need to focus on are the valuations of these companies, which might already be factoring in any upsides that lower oil prices can offer. Moreover, from the historical trends, the only thing that can be said about oil prices is that they are quite volatile and unpredictable. Hence, ling term value investors would do well not to lose focus on bottom up investing approach.

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