Chill! Oil prices below $80/bbl will not have much impact on the economy or the OMC’s

In the past we have seen oil prices as high as USD 140/bbl, and for the current environment, we think that oil prices till 80$/bbl will not have any material impact on the economy or the OMC’s, Akash Singhania, Sr. VP & Fund Manager, Motilal Oswal AMC said in an exclusive interview with Moneycontrol’s Kshitij Anand.

Q) Do you think the recent development on the geopolitical front (possible military action by the US on Syria) could cap upside for equity investors across the globe?

A) Geopolitical developments and news flow add volatility and have shorter-term impact on the markets. Running corrections in the market can occur based on the severity of any news flow.

However, longer-term markets are guided by earnings growth and valuation multiples. Global growth is picking up and it should translate into upside for investors in the long run.

Q) The crude price shock has taken equity markets by a surprise. Do you think if the crude stays above $71/bbl it would spell trouble for the economy as well as OMCs?

A) Sharp increases in oil prices can increase inflation and current account deficit. The follow-up impact is on hardening of interest rates and fiscal deficit.

In the past, we have seen oil prices as high as USD 140/bbl. In the current environment, we think that oil prices till USD 80/bbl will not have any material impact on the economy or the OMC’s.

Q) Mutual Fund flows have slowed down considerably in the month of March thanks to global volatility. Do you think the reduction in DII flows would play in charting direction for our markets?

A) Despite the reduction of flows in March the absolute amount of inflows is still large and we expect the inflows to sustain structurally on a long-term basis. We do not think that one-month reduction is a concern for the equity markets.

Q) Any stock/sector which you emerge as a dark horse in the year 2018 or FY19?

A) We are positive on retail-oriented banks and finance companies. We also prefer companies in the consumption and consumer discretionary space. Companies which are beneficiaries of GST implementation can emerge as a dark horse for the current year.

Q) A straight 6% kind of correction on Nifty from its record high of 11,171 gave plenty of fresh money to enter markets but at the same time fuelled nervousness among the traders. Do you think the pain is likely to continue?

A) Nifty has corrected from its all-time highs partly on the back of concerns on global markets and partly domestic ones. From the global market perspective, tightening of rates by the US Fed, shrinking Fed balance sheet and the imposition of tariff barriers have led to weakness in global equity markets.

Coming to the domestic front, the imposition of long-term capital gains tax, asset quality pain in the banking sector and lower than expected pick-up in corporate earnings and investment cycle have deterred market sentiments. The markets might consolidate for some more time, given the fact that valuations are also not cheap.

However, the longer term fundamentals and the structural story of Indian markets still remains intact. Any further correction should be viewed as a buying opportunity by long-term investors in the markets.

Q) Do you think protectionism measures initiated by the Trump government will impact Indian markets? If yes, which are the sectors that are likely to face the headwinds and why?

A) The protectionist measures by the US government might affect global trade equations, not only with India but across several countries and regions. Some of the sectors that might get impacted are the export-oriented ones like commodities, software, and pharma, depending on the nature and extent of the protectionist measures undertaken.

From a market perspective, it is not serious enough to derail the India growth story. India still largely remains a domestic demand-driven economy with robust consumption and strong potential for investment to counter any near-term export sluggishness.

A higher GDP growth rate (amongst the highest in global emerging markets), benign inflation, stable currency, low household and government debt, modest twin deficits makes India stand out as an attractive investment destination.

Q) After this recent correction, do you think inflows into MFs which picked up the pace in 2017 could now see some redemptions?

A) A running correction is always good and healthy for the equity markets as it gives an opportunity to long-term investors and puts idle cash on sidelines to work.

Equity inflows could have redemptions if the fundamental growth trajectory of Indian companies slow down materially or interest rates shoot up dramatically. We believe the inflows coming in the MF industry are structural in nature.

Q) FIIs seems to be bailing out from Indian markets, do you think the trend could continue at least for the year 2018?

A) FII investment in equity markets so far this year has been marginally positive. In the last few years (6 years) they have invested more than USD 12 billion on an average each year, though recently in the last 3 years, the average investment is around USD 5 billion. For the year, I would expect it to remain in line with the investments made in the last 3 years.

Q) FY18 belonged to the bulls but what is your outlook for FY19?

A) FY19 could be a volatile year for the Indian markets. The pace of interest rate hikes in the US, tightening of liquidity, global growth, oil prices, and trade policies would determine the direction of global equity markets.

On the local front, news flow around the state and central government elections, resolution of asset quality stress in the banking sector and pick-up in corporate earnings and growth would drive the Indian markets.

Q) Any particular sector(s) which is likely to hog the limelight in FY19?

A) Consumption sector including housing and consumer discretionary remains a perpetual strong theme to play. Companies in this space would continue to enjoy higher and longer business and earnings growth as they are more secular in nature.