Oil is on the boil and, as George Heber Joseph, CEO and CIO at ITI Mutual Fund, sees, it will simmer further beyond $ 90 a barrel, given the soaring inflation and tighter demand-supply situation in the US, even if it’s quiet on Ukrainian frontiers.
“By the long-term, the crude prices are likely to stabilise at $ 75 a barrel,” Joseph shares with Moneycontrol while talking of the macroeconomic scenario.
As the interaction moves on finances from macros, foreign institutional investors attract the attention. The FIIs, as they are referred to, have been net sellers for the fifth consecutive month, offloading more than Rs 1.55 lakh crore worth of shares. The veteran mutual fund industry professional predicts a minor reversal in the trend in the second half of 2022, and 2023 would be a good year for India-bound flows.
“India is on a strong footing because the earnings cycle in India has started picking up after a long haul. This is a very positive development which should act as a cushion to valuation and also to flows,” says Joseph, as the discussion shifts to deeper into the sphere of business. Excerpts from the interaction:
Do you think the Ukraine-Russia tensions will keep the equity market as well as crude oil prices volatile for some more time?
After COVID-19, there are supply chain challenges in all commodities, including crude oil. Most of the time, oil price movements in the near term are driven more by political factors than supply or demand led factors. We should expect the oil prices to move up further if the news flows of invasion builds up but we should understand that a lot of it is already in the price.
If the Russian invasion doesn’t happen, oil prices can fall in the near term. Looking at the demand and supply situation and inflation numbers in the US, I believe the oil price should move up along with other commodities in the short run but in the long run the crude oil prices should stabilise around $ 75 a barrel mark.
Do you expect Federal Reserve to start raising rates from May meeting onwards?
Based on the commentaries made by the Federal Reserve in the recently concluded Monetary Policy Committee meeting, it is reasonably clear that in the March 2022 Fed meeting, they are likely to disclose information regarding the broad rate hike plan.
Wage inflation in the US is for real and it is shooting above the comfort zone, so the question which remains is the quantum and the number of rate hikes. As per our assumptions, the market has already started pricing in roughly five rate hikes.
Coming to the domestic turf, do you think the consistent FII selling is a major risk for Indian equities?
India is one of the most expensive within the emerging markets (EM) zone. So, from the FII perspective, the selling was expected. Advancement of Fed tapering has accentuated the selling from FIIs as the cost of equity paradigm in case of equity valuation is changing.
Nevertheless, India is on a strong footing because the earnings cycle in India has started picking up after a long haul. This is a very positive development which should act as a cushion to valuation and also to flows. Therefore, our expectation is in the second half of CY22, FII flows should reverse in a minor way and CY23 could be a good year of flows to India.
Considering the headwinds like Fed rate hike fears, rising oil prices, inflationary pressure, state elections and so on, do you expect the market to give at least 10 percent return by the end of 2022?
Our expectation is that markets will consolidate and will start inching up by the fag-end of the year and can potentially end up with more than 10 percent return in the Nifty50 index.
What are the most exciting themes to pick now?
As we have put out in our Budget note and also have written in this month Factsheet, we are very bullish on the infrastructure theme with a 3-5 years view. The business cycle is reviving after 14 years and this seems to be the biggest theme to play at the current juncture. Infra push by the government, capacity utilisation catching up in many core sectors, and the visibility of order book increase kicking in make the theme very strong. As the cycle reverses, the EPS growth and multiple re-rating can be seen in the sector, given the earnings are in a suppressed situation for the last whole decade.
Are you more constructive on earnings growth going ahead after the end of December quarter earnings season?
Earnings are in line with expectations, input costs have increased in many sectors which they are struggling to pass it on to consumers. Oil price increase has created the cost inflation across board which can probably cool off in the second half because of base effect and some cooling off oil prices. But the broad trend is that the earnings growth trajectory has smartly move up from around 6 percent in the previous decade to 18-20 percent in the past few quarters.
Sectors that started improving are those which were a drag in the last decade and that is a very positive development. So, we are very constructive on the corporate earnings growth improvement story in the next five years.
Are you ready to invest in LIC IPO?
It is very difficult to talk about a stock or the valuation of insurance sector as both are complex subjects. Generally we believe that whenever a big IPO or large number of IPOs hit the market of a particular sector, that sector generally goes to the peak valuations. Umpteen examples we have seen from technology IPOs in 2000, Power/Real Estate/Infra IPOs/NFOs in 2006-07. We would be vary about the valuation in the sector and be cautious of making investments into this sector at this juncture.
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