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Can energy stocks be long-term wealth multipliers? HSBC’s Tushar Pradhan says no

Pradhan said volatility in the market will continue in the short term as there is a lot of uncertainty, which is not something that it likes

June 24, 2022 / 03:26 PM IST
Representative Image| Photographer: Sumit Dayal/Bloomberg

Representative Image| Photographer: Sumit Dayal/Bloomberg


Energy stocks have been among the biggest outperformers of this calendar year, but they can not be long-term wealth multipliers, said Tushar Pradhan, chief investment officer at HSBC Global Asset Management.

Shares of oil & gas and power companies have been one of the biggest underperformers for years. However, in 2022 so far, Nifty Energy having BPCL, GAIL, HPCL and Indian Oil as constituents is up 6 per cent. This is when Nifty 50 is down 10 per cent.

In an interview with CNBC-TV18, he suggested that energy companies are making money today just because oil prices have risen above average, and not because there has been any structural change in the long term story.

“The reason for all of these companies to trade at significantly lower multiples for a considerable period of time was a transition that is happening. People realise that climate change is a central subject it's of concern for everyone including asset allocators. One has to now find businesses which are more sustainable in the future as opposed to fossil fuels,” he said.

However, he added that the transition will be gradual. And hence, in the interim energy companies will continue to make money because of the demand, Pradhan said. “Investors have to understand that these are tactical moves…there may not be very very lasting value in these companies but yet for some time they may look attractive.”

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Volatility to continue

Pradhan said volatility in the market will continue in the short term as there is a lot of uncertainty, which is not something that it likes. He pointed out that the economy and interest rates are going in different directions.

If there is a “prospect of a possible recession in the US in the second half of next year, then you should look at easing interest rates, and generally creating a more comfortable situation monetarily. However, we look at the monetary policies today across the world and they are actually in tightening mode,” Pradhan said.

US Fed has turned extremely hawkish. It has recently raised rates by 75 basis points with forecasting more such moves. This, Nomura and other institutions, said may take the US economy towards recession.

Following such commentaries, markets have also taken a plunge. The US indices are already in a bear grip, falling more than 20 per cent. Indian indices have fared relatively better but still are down about 17 per cent from their highs in October last year.

“Most of the markets remain volatile because there is no clear direction. So asset calls today especially on equities or fixed income are difficult to take because there are so many dynamics involved in each market. I think volatility is likely to continue,” Pradhan said.
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first published: Jun 24, 2022 03:26 pm
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