Bullish on metals, oil & gas: ABN Amro MF

Amit Nigam, Fund Manager Equities, ABN Amro Mutual Fund, said today oil bonds is a big issue. "The government is actually pushed against a wall to take some steps, which in my view could probably be a price hike. The petrol and diesel contribution to the inflation index actually constitutes only 2% of the total basket. So, 2-3% kind of increase will bring a lot of relief in the existing loss bearing scenario. Its impact directly or indirectly to inflation would be hardly 30 bps."

Nigam is bullish on the commodities space where a resource crunch is visible be it ferrous space or non-ferrous space, and oil and gas space. 

He feels the public sector banks will be the most hit by the farm loan waiver.

Excerpts from CNBC-TV18’s exclusive interview with Amit Nigam:

Q: The bank Nifty actually rose a bit and then lost most of its gains. It has actually flattened out and so has the realty index. Would you say that banks now have some hard time to come? The Farm Waiver Bill has also not promised Rs 60,000 crore but is actually 20% higher than expected?

A: In the short-term or last few months, we have seen banks underperforming because of the agricultural loan waiver. But if you segregate banks between private sector and public sector banks, the hit would be more on the public sector space.

After this hit, over the last two months, we have seen the public sector valuations correct to very good levels. We would be looking at this space keenly from the valuation perspective. Slowing credit growth has been a reason of concern because of which the entire space has actually taken a beating, whether it has been the private space or the public sector space.

Q: Do you think we are looking at high inflation, high interest rate scenario? Do you think the stock market will start calculating or discounting these developments and we will be moving into a lower range?

A: The markets are probably discounting all these things already and that is a big reason why we have been underperforming the other emerging markets. If one were to advise equity investments in the fixed deposit then with inflation running at such a high level, the real interest rates do not make sense. I agree that today oil bonds is a big issue and the government is actually pushed against a wall to take some steps. It could probably be a price hike because the inflation index, if one were to look at the petrol and diesel, actually constitutes only 2% of the total basket. So, 2-3% increase will bring a lot of relief to the existing loss-bearing scenario and the direct or indirect impact to inflation would be hardly 30 bps. So, that could be one way out. The markets are already factoring in all these negative factors.

Q: You were talking about the market factoring in all these negatives. Have you got used to more than 7% inflation scenario? Is that no more a cause of reaction? Will we start reacting if inflation crosses the 8% mark? Are there any stocks or sectors that you like where we could play the entire inflation trend where pricing transfer is not really a concern?

A: Inflation has been an issue and is something that suddenly started hitting us on the face through the media over the last two-three months because we suddenly see headline numbers at more than 7%.

If you look for a normal man’s consumption basket, it is actually building in that. A lot of pulses that we consume and a lot of consumption items have actually doubled over last year. So, we are already living in that inflation zone. The markets are also factoring that.

The sectors that we are playing, or the consumer sectors, are the ones that are not so prone to inflation. They have a tremendous amount of pricing power and that is something we have seen across corporate India. Five years ago, crude was trading at USD 25-30 per barrel and today we are at USD 130 per barrel. Agreed that India and China, the two large emerging markets, have this consumption basket subsidized and we are not figuring in a complete deflection of the crude oil price hike. But we have seen a tremendous amount of pricing power among corporate India.

Q: What would be other sectors?

A: The other sector was banking and financials, where the valuations have corrected to a great extent, especially the PSU space. We are also looking at the spaces in commodities, where a resource crunch is visible, whether it is the ferrous space or non-ferrous space; these are other spaces that we are looking at. Obviously, the energy (oil &gas) space is something that we have played out well over the last three-six months, wherein we were positive and continue to remain positive.

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