Benchmark equity indices BSE Sensex and NSE Nifty plunged over 3 per cent intraday on Monday as the ongoing conflict between Russia and Ukraine showed no signs of ebbing. Meanwhile, Brent crude oil prices spiked to as high as $139 a barrel after reports of a possible Western ban of Russian oil. Aniruddha Naha, head equities, PGIM India Mutual Fund, in an interaction with Business Today said rising crude prices could impact margins and profitability of select sectors. He further shared his views on the strategy investors should adopt in the present uncertain times. Edited excerpts:
Business Today (BT): Brent crude oil crossed $130 per barrel over the fear of a ban on Russian oil. What does it mean for domestic equity investors?
Aniruddha Naha (AN): Crude happens to be one of the largest import bill contributors and expensive crude has a bearing on the macros of the country. It is not only inflationary but also increases the trade deficit and fiscal deficit. Higher crude could impact margins and profitability of quite a few sectors, which have raw material linkages with crude and crude derivatives. We have been cautious on equity markets for the first half of the calendar year and a higher crude price accentuates that view.
BT: What does a war between Russia and Ukraine mean for India Inc.? How can it impact earnings going ahead?
AN: Russia and Ukraine are both exporters of soft as well as hard commodities and energy. India, on the other hand, is an importer of commodities and energy. Any disruption in the supply chain of commodities and energy will push up their prices and increase the uncertainty and costs for corporate India. This will impact margins and profitability and will increase volatility in earnings. Hence, India Inc, will have to be prepared for volatility in earnings and will have to scout for alternate raw material sources. The geopolitical issue is very recent and one has to figure out the exact impact on margins and profitability across sectors, but suffice to say, that it will definitely have a negative impact in the near term.
BT: What is your advice to investors amid conflict between Russia and Ukraine?
AN: Investors have seen conflicts even in the past and markets have always recovered based on the growth and profitability of companies. Though the near term looks a little challenging on account of high crude prices, India has undertaken structural changes like GST implementation, reduction in corporate taxes which augur well for companies. Corporate India is underleveraged and a demand revival could see corporate capital expenditure come back after a long time in a subdued interest rate scenario. Indian corporates should do reasonably well in the next three to five years as demand revival leads to sales and profit growth. The present uncertain situation gives a great opportunity for investors looking to invest with a three to the five-year investment horizon.
BT: Is it time to sit on cash or stay invested? What is your strategy right now?
AN: Investors need to understand their asset allocation strategy and allocate available cash to be invested over a longer period of time. The markets have seen a decent correction, especially in midcaps and small caps. We do not take any big cash calls and are using this opportunity to invest in businesses that have strong cash flows, decent balance sheets and are available at reasonable valuations.
BT: Which themes may still deliver a handsome return to investors in the ongoing calendar?
AN: We continue to like information technology (IT) as a sector, where visibility of earnings is strong and valuations have seen a good correction. Incremental adoption of technology and its implementation should see sustained growth for the sector.
The revival of demand coupled with deleveraged balance sheet should augur well for industrial goods and we continue to like the sector. Real estate revival has started to happen after a long downturn and should sustain in the near future. The revival in real estate has a positive flow for the home building segment as well. Finally, once crude stabilises and comes off its highs, we believe, selectively, auto and auto ancillary companies should see reasonable growth over the next three years.
BT: Which type of mutual funds one should buy right now?
AN: Investors need to assess their risk appetite and return expectations while deciding on the correct mutual fund strategy. Any investor with commiserate risk and a time frame of at least three years or longer can look at a flexicap strategy or even a midcap strategy. Investors with a real long-term view can definitely look at a small cap strategy.
BT: Foreign institutional investors have been selling shares since October last year. How do you see the trend going forward?
AN: FIIs have made strong returns over the last couple of years in India. Given the rising interest rate scenario and some amount of risk-off in the overall environment, one can expect FIIs to continue to sell in the near term. Over the medium and longer period, flows will be driven by macros as well as corporate profitability, where India should do well vis-à-vis other emerging markets. India offers one of the largest consumer markets and a very well-diversified economy, across sectors like IT, pharma, consumption, which are structural in nature and hence will always evince interest from investors both domestic and FIIs.
BT: In which countries FIIs are buying right now?
AN: FIIs have generally been either investing in the developed world like the US or markets like China, which have underperformed vis-à-vis India.
BT: Mid-caps and small-caps have underperformed since the start of the calendar year. What’s next?
AN: Mid-caps and small-caps have had a very strong run in the last two calendar years and, hence, some amount of correction is warranted. Over the medium to long term, given the strength of cash flows and balance sheet, we expect their earnings to remain reasonably resilient and hence, these corrections lend a good opportunity to invest in these segments within a longer time frame.
BT: What is the right portfolio mix considering the present market conditions?
AN: There is no single right portfolio mix that can be used across investors. Investors must understand their risk appetite, return expectations and time frame to decide upon the right portfolio mix. To achieve that, they can consult a financial advisor who can help them plan their portfolio mix.
