‘India well placed to withstand short-term oil shock’
INTERVIEW
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Asa%ofGDP 877 3 2 4 2 7 ndia is in a much better place to withstand a sudden oil price shock unlike in the 1990s when both import and export baskets were not as diversified. Were the country to face an oil price shock, it would not have to cut back on oil imports as other items can flex to keep the current account in equilibrium and economic output will not contract, Anish Tawakley, deputy CIO, Equity, ICICI Prudential Mutual Fund, said in an interview, in the context of the rising tension in the Middle East. Edited excerpts:
The markets have discounted political continuity and domestic economic stability. What’s your base case?
The economy has been prudently managed and is well placed cyclically, i.e. demand is picking up and there is spare capacity available to meet that demand. This means output (gross domestic product), and earnings growth, is likely to be healthy over the next 2-3 years. So, we are fairly confident about the economy in the medium term. Since we are not experts in politics, we do not have any unique insights on what electoral outcomes will be.
Our approach is that if the economy is healthy and even if markets were to turn volatile, then one should use that as an opportunity to increase investment levels. But, we are concerned about valuations in the small and mid-cap space, where we believe the risk-return trade-off is adverse.
Geopolitical tensions (IranIsrael) can cause crude to flare to triple digits. What’s your estimation of when it will begin to hurt us (economy and markets) and for how long?
If one were to consider the economic impact, the current account is in very good shape. Also, we have significant reserves. Given this scenario, on a temporary basis, shocks can be easily managed from an economic perspective. However, if high oil prices persist, then currency should be allowed to depreciate as part of the adjustment process to high oil prices.
There is a difference between the economy in the ’90s and today. In the ’90s, oil was our predominant import item and we did not export much, relying mostly on remittances to keep the current account in equilibrium. So when oil prices shot up, the only option was to cut oil purchases, leading to a sharp economic slowdown as less oil meant less output.
Today, we have diversified imports and exports. While oil still is a big part of imports, other import items like electronics, tourism and education services are substantial. And, the export basket is diversified.
So the economy now can absorb fairly substantial oil price shocks given the level of reserves and the elasticity of the current account. This is the reason why Indian economy did not lose momentum when oil prices went into triple digits in the first half of 2022.
What are the expectations on Q4 earnings? What are your views on BFSI, IT, FMCG, industrials, pharma, etc.?
In general, we are positive on domestic cyclical sectors— auto, capital goods, financials and cement. These sectors are likely to see good volume growth. We continue to remain negative on the FMCG space where the problems are not related to the economy. These companies are trying to hold margins at levels that are hurting the competitiveness of their
What’s the house view or outlook for FY25?
Given the strength of both the US and Indian economies we do not expect aggressive rate cuts as there is no need to stimulate demand through rate cuts in either. In US, even if the Fed cuts short-term rates, one should not expect long-term bond yields to drop much. The yield curve is currently downward sloping and will revert to its normal upward sloping shape as and when short-term rates ease. From an equity market multiples perspective, it is the long-term yield that matters and not the short term rates. So, one should refrain from building an investment thesis around rate cuts leading to multiple expansion. Large-cap returns have lagged mids and smalls for many years, particularly in the last four years. Do you see the trend continuing, given 7-8% economic growth and inflation at 4-5%, resulting in nominal GDP of 12% or so?
We are fairly concerned about the small and mid-cap space and advise investors to be cautious. In past cycles, we have seen investors get drawn into stocks based on excitement around earnings over 1-2 quarters. But liquidity in these stocks tends to dry up when the performance mean reverts. We see the risk of a similar scenario playing out again.
What’s your advice to investors on how to approach the markets given the domestic and global economic and geopolitical factors?
While the economic outlook is strong, market levels are not cheap. In such situations, one should focus on improving the quality of the portfolio—rather than being in the riskiest segments of the market. In this case, it is better to be invested in large-cap companies with longterm track records. Investors should invest with at least a three-year horizon.
One constant refrain is private capex not picking up as desired albeit investment commitments for green energy, chip plants, etc. are top news. What’s your take?
Home building and construction are a very large part of private sector capex. There has been a clear and sharp uptick in this activity. Capex intensive sectors like cement, power and steel are seeing fresh investment activity. So, it will be incorrect to say private capex is not picking up.
What’s your view on rupee in the current fiscal?
Fairly large inflows due to bond index inclusion are expected. So our base case is that the rupee is likely to remain relatively steady. In case there is a oil supply shock, with a sharp and sustained increase in oil prices, then the rupee would be expected to depreciate to allow the economy to adjust.
‘‘ If high oil prices persist for a prolonged period, then currency should be allowed to depreciate Anish Tawakley Deputy CIO, Equity, ICICI Prudential Mutual Fund