The Indian equity markets i.e. the S&P BSE Sensex after having started the month of June 2014 on an ascending trend, being enthused by narrowing trade deficit, Current Account Deficit (CAD), relatively stronger rupee against the greenback and a lower fiscal deficit (for fiscal year 2013-14); has started shedding some gains. It is noteworthy that, the Indian equity market has been among the top performing ones in the Emerging Markets (EMs), with a return of nearly 20% clocked thus far this calendar year.

So what has lead markets to shed some gains of late?
Well, the reason for this is the sectarian violence in Iraq. A shadowy group known as Islamic State in Iraq and Sham (ISIS) has managed to seize control of key cities in Iraq, eyeing Iraq's wealth which is its oilfields. Iraq is the 2nd largest exporter among the OPEC (Organization of the Petroleum Exporting Countries) and such a chaos can certainly disrupt the flow of crude oil if tensions escalate.

While Libya's EL Feel oil production has resumed production (after security guards ended a protest that lasted more than two months), many oilfields and ports yet remains blocked, which again instils risk.

Brent crude oil vs. S&P BSE Sensex

Data as on June 13, 2014
(Source: EIA, PersonalFN Research)

Brent crude oil prices have already stoked up touching almost U.S. $115 per barrel. You see, rising crude oil is a grave concern as it infuses risk to:

• Trade deficit, which could widen on account of oil imports. At present for the fourth quarter of the fiscal year 2013-14 trade deficit contracted by about 33% to U.S. $30.70 billion and for the entire fiscal year 2013-14 to U.S. $147.60 billion from U.S. $195.70 billion in 2012-13. But with crude oil being a dominant item in India's import list, it could take a toll on the trade deficit data in the coming quarter of this fiscal year.
  
  
• CAD, in turn could widen on account of rise in import bill of crude oil. Thus far CAD has narrowed down to U.S. $32.40 billion (or 1.7% of GDP) in fiscal year 2013-14 from U.S. $87.80 billion (or 4.7% of GDP) in the previous fiscal year.
  
  
• Indian rupee could weaken against the U.S. dollar with the demand for dollar increasing in order to foot the import bill.
  
  
• Stoke up inflation, as the risk would emanate from fuel and power inflation. And if diesel prices are also increased as result, it could also have adverse implication on food inflation and manufacturing as well, since diesel is essentially transport and industrial fuel.
  
  

The adverse impact of the aforementioned macroeconomic variables would also pose a challenge to the new BJP led NDA Government which was recently elected to power by a thumping majority in the 16th Lok Sabha elections, as the electorates evinced hopes of a better tomorrow with Mr Narendra Modi at the helm. Thus far the NDA Government has been continuing the previous Government's policy of partial deregulation of diesel and has hiked diesel prices by 50 paise per litre. But if crude oil prices remain elevated, it would be difficult for the NDA Government to completely deregulate diesel prices as it would fuel inflation. On the other hand, allowing domestic prices to remain unchanged, poses a risk to the fiscal deficit as the Government would have to bear the increase in subsidy burden.

Thus recognising the implication of rising crude oil prices, the Indian equity market may come under pressure and the hope rally ahead of the full year budget for 2014 would lose steam. The markets would wait for policy announcements, which may give a better sense of direction to investors and how the NDA Government would handle the macroeconomic challenges.

The Approach to investing...
With the Indian equity market having made an all-time high recently, the margin of safety seems to have narrowed down. So going gung-ho and investing all your money at market top could turn to be imprudent. Nonetheless, if your risk appetite permits and if your asset allocation calls for you to invest in equities, take opportunity during a fall, but staggering your investment would be a prudent approach while taking exposure to equity. Don't buy aggressively, but rather buy selectively. Thoughtlessly investing or speculating can be hazardous to your wealth and health. Whether you are buying stocks or mutual funds you need to choose them carefully. While buying into mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

With uncertainty yet looming around in the domestic and global economy, it would wise to take refuge under gold and possibly seek opportunity in lower prices. PersonalFN thinks that, you should be a smart investor and view gold as a monetary asset rather than mere commodity as it carries a store of value in times of uncertainties. Gold can be an effective portfolio diversifier and good hedge during times of uncertainty. Considering ones investment horizon you can allocate 10% to 15% of your total portfolio towards gold (via gold ETFs). You see, gold is not an instrument to make quick money but a solid long term asset that offers store of value. Hence you should ideally invest in gold with a longer investment horizon.


The recent sectarian violence in Iraq has fuelled oil prices. A shadowy group known as Islamic State in Iraq and Sham (ISIS) has managed to seize control of key cities in Iraq, eyeing Iraq's wealth which is its oilfields. Iraq is the 2nd largest exporter among the OPEC.

Do you think the insurgency can disrupt the flow of crude oil if tensions escalate? Also, what in your view would be the impact on the Indian equity market? Share your views here.

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