Dr Joseph Thomas, Head Of Research, Emkay Wealth Management, said the rise in crude oil prices could be short-lived as it has been sparked by the ongoing Middle East conflict, though some impact on India Inc earnings and economic growth cannot be ruled out. He advises against tweaking the portfolio amid this setup.
Additionally, among the top investment ideas, he finds value in tech, defence and the private banking sector. In the commodity space, he remains bullish on gold, advising to buy the precious metal on dips. Edited excerpts:
Middle East conflict has emerged as a new risk for the Indian stock market. How does it alter your return expectations for Nifty 50?
Even before the geopolitical concerns flared up, the return expectations from Nifty 50 were fairly muted. The primary factors influencing a subdued return expectations scenario were limited liquidity (no buoyancy in FII flows) and sub-par earnings growth.
At the current juncture, the earnings projections (and return expectations) have not been downgraded substantially as India is not a direct party to the current geopolitical situation. The impact on India’s private as well as public finances would largely be influenced by the movement and stickiness of oil prices.
As has been the case during the Russia-Ukraine conflict, if the oil supplies remain intact, then the impact on India Inc’s earnings might be limited. A prolonged conflict that leads to crude prices remaining sticky above US$ 100 per barrel may have an outsized impact on growth trajectories, at both GDP and individual business levels. Oil prices remain the key monitorable to gauge the impact on earnings and on return expectations.
If crude prices remain elevated, should investors consider tweaking their portfolios?
The crude prices remain elevated due to only one factor, which is the Middle East conflict and the disruption of fuel flows into other parts of the world through the Strait of Hormuz. This may be a short-term phenomenon, which may last for a period of two or three weeks. There is no need to tweak the portfolios at this juncture based on this one exogenous factor. In fact, since March 10, oil prices have come down drastically.
Fundamentally, the oil supply is expanding faster than the growth in oil demand. In the long run, it is this reality that would guide the prices. If the conflict rages on for a few months, then higher domestic prices could potentially trigger higher inflation. Generally, a sudden spike in oil prices sustained for a long time could impact GDP growth adversely to the tune of approximately 0.50%. As it happened in the case of the Russia-Ukraine conflict, the world could gradually get used to the situation and plan things accordingly.
Which sectors currently offer the most attractive investment opportunities in the Indian market?
In terms of sectoral opportunities, the tech sector, the defence sector, and private banks offer relatively stronger growth prospects, even under the current set of market conditions. However, it should be borne in mind that from a portfolio perspective, stocks have turned cheaper across market caps, and this should also not be lost sight of.
Are mid-cap and small-cap stocks turning attractive, or do they pose risks at current levels?
Mid and small caps have lost altitude to the tune of almost 20-40%, and this fall is true of almost 50% of the stocks. Generally, going by the past trends, a handsome recovery may happen over the next 12 months, as this slide has been on for the last 18 months or more. Other conditions that support a rise in these segments are the enduring positive impact of the tax benefits — both income tax and GST — better earnings growth, the large quantum of public capital expenditure provisioned in the budget, and the relatively low interest rates and plenty of liquidity.
Market returns have been nil for 18 months now. How long do you see this trend continuing?
That is a peculiarity of equity markets. As you may recall, if the period before Sept 2024 is considered, the equity market was giving superlative returns. The fall came gradually after that. The market demands patience and time to be invested for it to give optimum results.
Do you expect the prices to remain in this lull mode after the spectacular rally of the last 2 years?
Gold still continues to be a good investment. Fundamentally, strength for gold will come from two factors: the further fall in the US interest rates, and the depreciation of the US Dollar against currency majors.
There has been strong demand from central banks in the last two to three years. In light of the uncertainties around trade, increasing threats of geopolitical tensions, gold is likely to remain well-bid. However, we should not ignore the fact that the rise in gold prices has been quite swift and in a short period of time, the prices galloped up, so buying on corrective downward movements would be more feasible.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
