Daily Voice | Energy transition and power space is an exciting segment to focus on, says this fund manager

Yes, rising crude oil prices could indeed pose a significant risk to the equity market in the short term. As oil prices surge, concerns about inflation intensify, given that oil is a primary input cost for numerous sectors. Inflationary pressures can erode corporate profits, leading to reduced stock valuations. Furthermore, India, being a net importer of oil, is particularly vulnerable to global oil price fluctuations.

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As the cost of energy increases, businesses and consumers might cut back on spending in other areas, potentially slowing economic growth. This reduced spending can further impact corporate earnings and, by extension, stock prices. Additionally, the unpredictability of oil prices can introduce heightened volatility in the stock market, making investors more cautious and potentially leading to capital outflows.

Q: Given the increase in oil prices raising inflation concerns, do you expect the Monetary Policy Committee to be cautious?

Absolutely. The Monetary Policy Committee (MPC) of the Reserve Bank of India is tasked with ensuring inflation remains within a targeted range. With rising crude oil prices, inflationary pressures are mounting, which could push inflation beyond the MPC's comfort zone. Even though domestic oil prices are partially regulated, the ripple effects of global price hikes can still permeate the Indian economy.

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The MPC will likely prioritize keeping inflation in check, which could mean maintaining or even raising interest rates to curb excessive spending and borrowing. However, the MPC will also be mindful of the need to support economic growth, especially in a post-pandemic recovery phase. Thus, while the MPC is expected to adopt a cautious stance in its upcoming policy review, it will likely strike a balance between inflation management and growth stimulation.

Q: Sectors where the valuations are stretched now?

Valuations in the Indian equity market have been stretched across multiple sectors, especially after the recent run-up. Specifically, the midcap, smallcap, and microcap segments have witnessed a sharp surge, leading to valuations that appear overstretched relative to their historical averages. This rapid appreciation is a result of increased liquidity, robust retail participation, and heightened investor optimism about economic recovery and growth prospects.

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Additionally, the new age technology sector, which has garnered significant attention from institutional investors, has seen elevated valuations. While these sectors have shown strong performance, their current valuations indicate that much of the future growth might already be priced in.

Investors should exercise caution and conduct thorough due diligence before making investment decisions in these sectors. It's essential to differentiate between sectors with genuine growth potential and those where valuations might be running ahead of fundamentals.

Q: Are energy transition & power segments exciting ones to focus on?

Yes, the energy transition and power space is indeed an exciting segment to focus on. As the world grapples with the challenges of climate change, the shift from fossil fuels to renewable energy sources is becoming imperative. This transition presents vast opportunities for innovation, investment, and growth.

The power sector is at the heart of this change, with advancements in solar, wind, and battery storage technologies leading the way. Additionally, the integration of artificial intelligence and digital technologies is optimizing energy distribution and consumption, making grids smarter and more efficient.

Countries like India, with its surging power demand, underscore the potential of this sector. The push for cleaner energy solutions, coupled with technological advancements and supportive government policies, makes the energy transition and power space a dynamic and promising area for stakeholders across the spectrum.

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Q: Sectors that can be outperformer and see rerating in the September quarter earnings season starting soon?

In the forthcoming September quarter earnings season, several sectors in the Indian market are poised for notable outperformance and potential rerating. The capital goods sector is set to gain momentum, driven by the government's emphasis on infrastructure development and a resurgence in private capex. The metals sector, buoyed by robust demand from China and other emerging economies, is anticipated to witness significant growth.

The pharmaceuticals sector is expected to thrive due to strong demand for generic drugs and surging exports. The IT sector, benefiting from a heightened demand for digital transformation services, is also on the radar for potential outperformance.

Lastly, the consumer staples sector, underpinned by sustained demand for essential goods, is likely to stand out. As the earnings season approaches, these sectors present promising opportunities for investors, though a thorough analysis of individual stock fundamentals remains crucial.

Q: How do you filter the stocks for investment?

Wright Research employs a rigorous, data-driven approach to filter stocks for investment. We begin with a broad universe of stocks and apply quantitative criteria to ensure basic liquidity and market capitalization thresholds. Next, we utilize our proprietary factor-based models, targeting factors like momentum, quality, value, and volatility, to identify stocks with potential for outperformance. Each stock is scored based on its adherence to these factors, ensuring a holistic assessment rather than isolated metric consideration.

Additionally, our regime models help in discerning the broader market environment, enabling us to be more defensive or aggressive depending on market conditions. Expert execution models further refine our choices, optimizing for cost and minimizing potential market impact. Finally, before a stock makes it to our recommended list, it undergoes a final validation against any current global and sector-specific macroeconomic trends or risks. This multifaceted approach ensures our stock picks align with our strategic intent and risk tolerance, driving consistent value for our clients.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.