Monday, July 2, 2018

Is correlation between Nifty and Crude Oil a MYTH?

Crude is one of the highly traded energy commodities and keeping close watch on the same is very important. On media or business news channels we have seen many times that experts speak about the impact of Crude prices on Indian Equity Markets.
You may have heard that rising crude prices are bad for economy and thus it will have negative impact on stock market or falling crude prices are good for economy. These are the two important phrases which we have seen on media many times. However to be objective in the market, it is very important to look at the trend of each of these asset classes and also to understand if stock market is really moving on back of volatility of Crude or not!
Following is the research by Ashish Kyal, CMT published in Journal of Economics by National Institute of Banking Management (NIBM – Pune) and circulated across the banking industry.
Nifty and Crude Oil- Understanding the relation

We have placed both these asset classes in the same chart to understand the overall correlation. Here we can see that in the year of 2008 it was the Indian Equity Market which formed a top earlier and then after few months Crude followed the trend of Indian Equities and started to move lower. Post the same in the start of 2009 both these assets formed a low more or less in the same month. From the above chart it can be seen that high direct correlation existed from 2008 till 2010 between Nifty and Crude prices.
In the period from last quarter of 2010 to first quarter of 2011 there was an inverse relation during which Nifty showed sharp fall but Crude continued to move higher. 
From 2011 to the mid of 2013 Crude and Nifty both moved in tandem. This was the period where predictability would have become easier depending upon the trend of other asset class. However this relation fade away and then we witnessed inverse relation from mid of 2013 to the mid of 2015. This was the period when people came out with the frame that falling crude prices are good for Indian Equities. However after mid of 2015 Crude and Nifty both started to move lower.
The period from mid of 2015 to start of 2017 was period again with high correlation and it showed direct relation. Interesting thing to observe was that both these asset classes moved higher together. Isn’t it surprising to see this?
Case in point: From the above observation it can be said there are different periods in which Crude and Nifty had direct and inverse relation.  Here we can also see that period of direct relation was longer than that of inverse relation.
The above chart clearly shows that it is “Myth” that rising Crude prices have negative impact on Indian Equity Market. The fact is that both these asset classes have continued to follow their respective trends in which they existed.
Food for thought: If low Crude Oil prices are good for Oil Marketing companies like BPCL, HPCL, IOC which has showed exponential rise and has provided support to the Nifty in last few years. On the other side there may be a case that high crude prices can increase the profitability of companies like Oil India, ONGC, Reliance Industries which has one of the highest weightage on Nifty and Sensex and thus greater support can be expected from Reliance in coming years.
In short, judging the performance of Indian Stock Market based on Crude prices is not a good idea since there is no consistency in the correlation and thus one should follow objective technical tools to understand the overall trend.
Learn the application of above techniques on different markets – Equity, Commodity and Currency in the upcoming training on 21st and 22nd July in Mumbai and develop trading strategy. Know more here

No comments:

Post a Comment