Wednesday 22 September 2021

Do Paint Stocks and Crude Oil Tango? - vrk100 - 22Sep2021

Do Paint Stocks and Crude Oil Tango?  

 

It's often said that rising crude oil prices are a negative for paint stocks in India as crude oil is the major raw material for paint companies. On business television, we often hear that paint stock prices are under pressure due to rising crude oil prices. Is this view really correct?

If companies have competitive advantages and pricing power in the market, higher crude oil prices are not an immediate dampener for paint stock prices. Indian companies, like, Asian Paints and Berger Paints have demonstrated over the years that they are able to pass on higher raw material prices to consumers--while maintaining their sales growth and profitability. (This is not a recommendation for stocks or commodities; this is just for information purpose only).

A rough glance at the price chart (TradingView) for the past five years indicates that there is little correlation between the stock price of Asian Paints and Brent crude oil price. For comparison, the Nifty 50 index is also included.

Five-year chart: (click on the image for a better view)

As can be seen from the above graph, the Asian Paints stock has increased by 178 per cent in the past five years, while Brent oil has gone up by 55 per cent and Nifty 50 has doubled in the same period.

It's always a good idea to check the facts before we believe what many market people tell us on television day in and day out.

One could argue that correlations need to be checked over long periods of time, not just five years or 10 years. It's a fair point. However, as we've seen in Indian stock market, paint stocks have done well even in times of rising crude oil prices. That does not mean paint stocks will do well even when oil prices skyrocket to say USD 100 or USD 200 per barrel.

In stock market, there are various factors that affect stock prices. At any point of time, a few factors outweigh other variables. As investors, we need to be careful of the market narrative and always watch out for the real factors.

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

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Twitter @vrk100 


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