Daily Voice: Iran-Israel conflict may drive Brent crude above $100 a barrel, but sustainability uncertain, says this investment strategist

"Iran-Israel conflict could indeed push Brent crude prices above $100 per barrel. However, the duration of sustained high prices is uncertain, as it depends on various factors," Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, said in an interview to Moneycontrol.

He also expects three rate cuts from the US Federal Reserve later this year. "Whenever it occurs in 2024, it is likely to continue for about 18 months, possibly covering all of 2025," he said.

Vikas, the founder of Omniscience Capital with 20 years of experience in capital markets, feels banks, power infrastructure NBFCs, and IT companies have improving return on equity0 (RoEs) and are not yet popular on quality screens.

Edited excerpts:

Do you expect the situation in the Middle East to worsen, potentially leading to Brent crude futures surpassing $100 a barrel?

With Iran directly involved in the Hamas-Israel conflict, there's a high likelihood of further escalation, potentially leading to a worsening situation in the Middle East. This could indeed push Brent crude prices above $100 per barrel. However, the duration of sustained high prices is uncertain, as it depends on various factors.

Why is there a high demand for gold, leading to new highs, and is there a significant emerging risk due to this demand for a safe-haven asset?

The main driver of gold prices appears to be China. The Chinese Central Bank (PBoC) has been buying substantial amounts of gold following the US freezing Russian global accounts. Additionally, the US-China tensions might be prompting the PBoC to diversify its assets away from the US.

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Individual investors in China are also turning to gold as a safe haven due to poor performance in other asset classes such as real estate, equities, and risky bank deposits.

We believe that the emerging risk is primarily localised to China and does not represent a global phenomenon. Despite the high-profile conflicts in Ukraine-Russia, the Middle East, and potential tensions in China-Taiwan, the global economy appears robust with strong growth and decreasing inflation.

While there is a possibility of crude oil prices and commodity prices escalating due to these conflicts, the lack of significant price increases during the Ukraine-Russia war suggests that the impact of such conflicts on commodity prices may be limited and temporary.

Is the current market correction a significant buying opportunity for quality stocks, and what sectors do you suggest betting on?

When considering quality stocks, it's crucial to clarify the criteria. Traditional market favourites over the last decade, despite recent flat or negative returns, remain highly overvalued. For instance, Nifty FMCG trades at a PE of 42 and Nifty Consumer Durables at 71.

On the other hand, Nifty 100 Quality 30 and Nifty 200 Quality 30 offer more reasonable PEs of 31 and 33, respectively. These indices include a diverse mix of IT, automobile, and FMCG companies.

Currently, well-known quality companies with strong Return on Equity (RoE) are still overvalued. The focus should shift to companies with high and persistent competitive advantages, strong and cash-rich balance sheets, and exposure to large and fast-growing sectors. Some of these companies have improving RoEs and are not yet popular on quality screens. Banks, power, infrastructure, NBFCs, and IT companies fit the profile.

Do you anticipate the US Federal Reserve reducing the number of rate cuts to two from three and shifting focus to inflation?

We still expect three rate cuts this year. Inflation is consistently decreasing, and the drop in rental inflation, not yet reflected in CPI numbers, will likely be included soon. The timing of the rate cut meeting is less important than the fact that whenever it occurs in 2024, it is likely to continue for about 18 months, possibly covering all of 2025.

What is your perspective on the India-Mauritius Treaty Amendment?

The amendment was anticipated by the FII community, and most have likely already taken actions to mitigate its impact. It may not have a significant immediate impact, but some FIIs could consider moving to GIFT City due to the lack of major tax advantages in Mauritius.

What are FIIs' expectations from the government post the general elections?

Expectations include increased focus on infrastructure spending, continuation of 'Make in India' and 'Make for the World' initiatives, and support for sunrise sectors and the startup ecosystem. Prudent fiscal deficit management is also expected to stabilise the INR against the USD, potentially improving USD returns from Indian markets in the long term.

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