Daily Voice: No need to press the panic button yet; too early to take a constructive view on earnings derating amid the US-Iran war, says Pradeep Gupta

Pradeep Gupta is the Executive Director and Head of Investments – India at Lighthouse Canton

• If Iran conflict persists, it can threaten India on multiple counts
• It is a high-risk phase, markets likely to remain volatile
• It's too early to take any constructive view on earnings derating or macro distortions

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"We don't think it's time to press the panic button yet. The bulk of the consolidation and correction is behind us for Indian markets," said Pradeep Gupta, Executive Director and Head of Investments – India at Lighthouse Canton, in an interview with Moneycontrol.

According to him, it is too early to take any constructive view on earnings derating or macro distortions that may arise from the ongoing war situation.

He noted that if the conflict persists, it could threaten India on multiple fronts. The country imports more than 80 percent of its crude oil needs, and the INR is highly sensitive to oil price shocks, which further impact the import bill, current account deficit, and inflation trajectory, he said.

Do you see a strong possibility of oil prices rising above $100 per barrel, or do you expect a healthy correction, considering the current situation in the Middle East?

We believe this entirely depends on the magnitude and duration of the conflict. We have already witnessed a sizeable upmove in oil prices. Having said that, the crude market is extremely measured. If oil trade is disrupted for a prolonged period, or if the war spills over into neighbouring countries with oil infrastructure under threat, one may witness such levels but unlikely to sustain for long.

At the same time, any near-term pressure will be partly offset by additional 2 million barrels supply by OPEC. Also, any truce with Iran may mean lifting of sanctions on Iran which mean Iranian oil supply also rises.

What would you prefer to buy in the current market correction?

Indian markets have seen prolonged time and price corrections over the last 18–20 months. The ongoing conflict is likely to keep markets depressed in the near term. However, we believe the overall risk-reward for Indian markets is skewed to the upside.

The current crisis will provide a tactical window to build exposure in quality counters with secular earnings predictability and margin of safety. One must take a constructive view from here on Indian equities.

Is it advisable to stay away from crude-sensitive stocks for now, or should investors wait for tensions to ease before accumulating such stocks?

Usually, higher crude prices tend to benefit upstream oil producers, but this pack is also likely to witness volatility. Oil marketing companies may not be best placed if retail fuel prices are not revised in response to a sizeable flare-up in oil prices, thus affecting margins.

Oil exploration companies can see positive sentiment, while refiners and fuel retailers could face margin compression. Fundamental overlay on these set of opportunities is a must though.

Do you foresee any changes in earnings estimates or economic growth projections in light of the US-Iran tensions?

We don't think it's time to press the panic button yet. The bulk of the consolidation and correction is behind us for Indian markets. It's too early to take any constructive view on earnings derating or macro distortions that may arise from the ongoing war situation. Ongoing conflict is likely to drain overall sentiments even further. As we said, much depends on the magnitude and duration of the conflict for now.

Do you think most of the negative news has already been discounted by equity markets, or is the worst still to come?

It's always difficult to call a top or a price in such situations. However, we don't think there is any structural uncertainty yet. It is a high-risk phase, and markets are likely to remain volatile. Markets will make rapid adjustments depending on how the war unfolds. Overall risk-reward for Indian markets is skewed to the upside for those with the stomach to ride through near-term pain.

Do you see any major threat to the Indian rupee due to the escalating tensions in the Middle East?

There certainly remains a heightened risk of negative developments with respect to the INR, but this is likely to be short-lived, at least on account of the ongoing war. The INR has already weakened past 92 per dollar.

If the conflict persists, it can threaten India on multiple counts. The country imports more than 80% of its crude oil needs, and the INR is highly sensitive to oil price shocks, which further impact the import bill, current account deficit and inflation trajectory. Remittances from Indians working abroad can take a hit in the short term, while FPI outflows from Indian equities can intensify due to risk aversion.

Do you believe the markets need to undergo a meaningful correction for FIIs to return in a significant way?

Not really. While slowing earnings momentum and higher valuations were among the reasons for FIIs to exit Indian markets, there are other considerations as well. A large part of the market has witnessed steep corrections.

Market breadth today depicts extreme pessimism. Much of the excess has been taken out and valuations are back to neutral territory at large. India’s macro led solidity, continued policy push, earning resurgence & recovery momentum remains understated, at least from market lens.

Any further correction, with earnings recovery progressing over the coming quarters, will only make the risk-reward even more compelling. That said, other macro-led events can certainly put a near-term pause on the resumption of FII flows.