The current crisis imposed by the Russia-Ukraine war will undoubtedly impact the financial market. Mrinal Singh, CEO and CIO, InCred Asset Management, explains the long-term effect
The markets have experienced a decent correction over the last few weeks mainly due to aggravating geopolitical tensions among Russia and Ukraine. What is your overall assessment of the current market scenario?
Such crises in the past have stemmed the financial market. They have been both the causes and effects of the underlying trends that have driven global affairs over the last two decades. One event that shook the modern world and had a sharp impact on financial markets, as well as global stability, was the September 11 attacks and the ensuing response. Similarly, the war in Kargil, the US-China trade war and the attack on the WTC have all had a severe impact on the financial markets and have created periods of extreme fear and uncertainty. Russia’s attack on Ukraine has created further global insecurity and uncertainty. However, one should always look at the performance in the long run. Thus, it would be relatively best to focus on those sectors in India whose growth may not be as affected by global upheavals.
Amid the ongoing Russia-Ukraine crisis, Brent crude oil prices have breached the USD 111 mark, touching nearly an eight-year high. Will this hamper the growth prospect for companies over the next few quarters? Which sectors appear vulnerable to you?
Let’s understand it this way: the pump prices increase by Rs 5 per litre for every USD 10 per barrel rise in crude oil price if fully passed through. To offset this surge in prices the excise duty needs to be cut which eventually will lead to lesser excise collection and impact the government finances in terms of loss of revenue. The global oil supply could likely remain restrained in the near term with the Organization of the Petroleum Exporting Countries (OPEC) producing well below its production targets and the US production remaining range-bound.
It is likely to remain volatile if the ongoing geopolitical conflict does not materially ease. Given India is highly dependent on oil imports, such a steep rise in oil prices can be a concern with respect to inflation, current account deficit (CAD), corporate profitability and currency. In any case, we are able to fund our crude or energy inputs through our IT exports. In the last 20 odd years, for the first time our IT exports are in excess of USD 150 billion for this fiscal, which is sufficient to provide for our energy imports, comprising crude to a large extent.
In the near term, high oil prices will push up inflation because crude is imported and it also has an effect on crude derivatives which are in terms of chemicals or petroleum products of various orders. Sectors such as paint, chemicals, oil marketing companies, aviation and cement are some of the vulnerable sectors. In the era that we are in today, the future is clearly green. The source of energy generation would be more environmentally compliant. Higher fossil fuel prices may make those business cases more viable.
What are the most promising investment themes you would like to bet on over the next 8-10 years?
It is important to note that the Indian economy looks robust from a long-term perspective and if you are looking to build robust long-term portfolios then you must treat this volatility and period of turbulence as an opportunity to invest in excellent companies and themes at compelling valuations. We are clearly seeing that the economy or a section of corporate India has walked into the capital expansion mode. IMF says our per capita income is something like USD 2,200 and by FY25 they estimate that we would cross USD 3,000 and by 2030 we would cross USD 4,700. The important point is the transition from USD 2,000 to USD 3,000. Sectors related to spending on individual mobility, education, leisure, travel, entertainment and consumer durables will contribute to this journey.
To reiterate, the outlook for the Indian economy is quite robust. We see potential, particularly in segments that are driven by capacity expansion. Our propositions are more inclined towards domestic manufacturing and capacity addition with the participation of sectors that are going to meaningfully participate in the China Plus One movement. However, there could be an addition to that area such as textiles, chemicals, engineering boards, automobiles as well as sectors aligned to a greener future of the economy. We believe even housing and the mortgage space looks appealing.
