Sonam Srivastava is the Founder of Wright Research
The up move in commodity prices would impact the input costs for India’s wide range of sectors. Margins will face tight pressure in such an environment, seeing earnings decline, says Sonam Srivastava, founder of Wright Research in an interview to Moneycontrol.
There has been a massive upsurge in the price of crude, natural gas, metals, and agro commodities after the beginning of Ukraine’s invasion by Russia.
In terms of worst-hit sectors, “automobile, consumer durables, chemicals, fertilizers, FMCG, construction, and real estate will be under pressure due to the commodity price rise due to the crisis,” says Sonam, a quantitative investment management and trading professional.
After a significant run-up in commodity prices, do you expect the first half of the next financial year to be challenging on a fundamental basis?
The run-up in commodity prices would impact the input costs for India’s wide range of sectors. There has been a massive upsurge in the price of crude, natural gas, metals, and agro commodities. While crude oil will affect downstream oil firms, paints chemicals, aviation, and auto sectors, the rising metal prices will hit manufacturing, auto builders, and other metal consumers. Margins will face tight pressure in such an environment, seeing earnings decline.
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Only the larger players with pricing power will pass on the price rise to consumers, and smaller companies might struggle to maintain profitability. The demand will also slow down due to rising prices and bad sentiment. Though many speculate that commodity prices have already peaked and will consolidate now, the effect will be transitory.
After a sharp sell-off across sectors in recent turmoil, what is your pecking order in terms of sectors to bet on?
In the recent turmoil, easy picking would have been metal and oil & gas manufacturing companies which are commodity sellers and stand to gain from the commodity price rise. But as the commodity prices might have peaked to a certain extent, the future outlook on these sectors is cautious.
If the war does not escalate further, the next stressor would be the rate hikes by the US Fed, and in light of that, Banking & Financials would be the sector to bet on as it flourishes at a high rate environment. On the other hand, the IT and Pharmaceuticals sectors have shown momentum as they have no commodity exposure and gain from currency depreciation.
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The sectors facing immense stress would be Autos, FMCG, chemicals, industrial, manufacturing.
Do you think the government will not pass through the oil price spike especially after winning four out of five states elections?
The petrol and diesel price hikes that were not imposed before the election might come into force post-election despite the ruling party winning four out of five state elections. This hike is because of the unprecedented crude prices and increased pressure on oil marketing companies. As a result, the government might start subsidizing the oil prices beyond a specific limit, but oil price spikes might continue in the current escalating scenario.
How should investors position their portfolios as ultra-low interest rates environment might be behind us?
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In the high-interest rate environment, the sector to focus on would be Banking, Financials, and Insurance which flourish in a high-interest rate environment, and stocks to avoid would be any stock with high leverage as the stress on those would increase.
IT and Pharmaceuticals are also good bets in this environment. Investors can also add short-duration bonds into their portfolios to diversify the risk.
After this Ukraine-Russia war and sanctions imposed on Russia by western world, what are the sectors that will benefit the most or will do well and sectors that will hit the most, in terms of stability?
The most significant effect of the sanctions is commodity price inflation. We have seen oil manufacturing stocks, metals, sugar sectors being positive despite the turmoil. IT and Pharmaceuticals have stayed strong because of currency devaluation and foreign exposure. Stocks exporting metals or agro commodities will be in favour.
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In terms of worst-hit sectors, automobile, consumer durables, chemicals, fertilizers, FMCG, construction, and real estate will be under pressure due to the commodity price rise due to the crisis.
Do you think the worst is behind us and is it a bull market correction?
There definitely are better days ahead for the market. We are at historically low valuations, and the geopolitical situation is likely transitory. Indian economy is strong, and earnings are expected to keep doing well in the coming quarters despite a blip caused by the current situation. The tricky question is calling when the bottom has been reached, and all we can do is watch the geopolitical triggers to answer that. Once the geo-political situation calms down, we expect a relief rally.
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