"Both the economic and financial sanctions imposed on Russia by the western and select Asian nations cannot ease tensions, but stricter sanctions like hike in crude exports can," Kamal Manocha, founder and CEO of PMS AIF World, told Moneycontrol in an interview. The tensions have caused severe selling in equity markets globally in the last few days.
On stocks to pick amid the current steep fall, Manocha with more than 15 years of experience in investment advisory says one should stick to companies that command brand equity and consumer affinity because they will be able to pass on the inflation by way of price hikes. "Over time, inflation will reduce, and increased prices will only boost margins of these companies," he said.
Ukraine-Russia tensions are intensifying. Do you think the sanctions imposed by western countries and select Asian nations could ease tensions?
Ukraine wants to be a part of the NATO community, so that it does not lose its status as an independent nation, which Russia is opposing. Joining NATO would also help Ukraine as it is a small country and is in an emergency state of a war. Russia does not want Ukraine to be a part of NATO because if Ukraine becomes a part of NATO, Russia would be surrounded by all NATO countries that predominantly favour the US.
Both the economic and financial sanctions imposed on Russia by the western and select Asian nations cannot ease tensions, but stricter sanctions like hike in crude exports could ease tensions. Russia is a $1.8 trillion economy with a forex reserve of $600 billion and most of its reserves are in gold. Russia is a very important country from the global economy's perspective as 1) It is the third largest exporter of crude oil 2) Second largest gas producer 3) Around 40 percent of Russia's gas is distributed to European countries of which 20 percent passes through Ukraine.
Thus, the war will surely have economic and non-economic implications, and any tensions must be sorted with a dialogue and will eventually be sorted that way only.
After geopolitical tensions, oil prices jumped over $100 a barrel. Do you expect prices to cross $120 a barrel soon and, as a result, can the RBI revise its inflation forecast and GDP growth estimates?
Just like other commodities, oil prices are likely to rise and remain volatile and with the rise in the geopolitical tensions, crude oil prices are expected to be all the more uncertain and, in the current context, can surely go above $100 a barrel in 2022. As long as oil prices are in the range of $100-120, India will sail through with a little bit of difficulty, and beyond that it would be a difficult situation. India would have an impact on the trade deficit that can go up to $140 billion if oil prices go up to $125 a barrel.
With a rise in oil prices, RBI is likely to revise its inflation forecast to around five percent and give a more conservative GDP growth estimate of around eight percent.
Do you expect the Indian government to pass on the oil price spike with a steep hike in fuel price after state elections?
India is a $3.4 trillion economy and a rise in oil prices can lead to a trade deficit of four percent. As oil prices in India have remain unchanged for more than three months now, a steep hike in fuel price is expected in the near future.
Especially after intensified geopolitical tensions, do you still expect faster policy tightening by the US Federal Reserve in 2022?
Since the US is an ally of Ukraine, focus may shift towards tensions at the geopolitical level. But the rate hikes are monetary policy decisions, and are expected to continue as forecasted earlier and as per guidance. This is because of the higher than normal inflation numbers which surged to about 7.5 percent last month as compared to previous year, highest in 40 years.
After COVID hurting economies for the last two years, do you think Ukraine-Russia tensions would be a major hindrance for global growth in the year?
During such times, it is always good to take a perspective with some help from history. Considering S&P 500 as a benchmark and the US markets as a proxy, the largest historical drawdown due to war was in conjunction with Nazi Germany's entry into Czechoslovakian nation in 1939 and the attack on France in 1940. The S&P 500 fell by 20.5 percent and 25.8 percent respectively. One year later, the market was up almost 19 percent and 9 percent respectively, eliminating much of the drop. Even during the India-China face-off in 2021, the Indian economy grew by around nine percent. Global growth may co-exist with such situations.
When the market corrects and turns volatile, mid and small caps are hit harder than large caps. So should one be cautious while investing in small and mid caps and stick to large caps now?
The market cap has very little to do with geopolitical tensions. Large, mid, small cap selection is more to do with the investors' time horizon. Small caps are meant for an investment time horizon of more than seven years, mid-caps for five to seven years and large caps for three to five years. One should follow majorly a strategic asset allocation and but as a part of tactical allocation, it is always wise to stick to large caps in a volatile environment, as these demonstrate lower drawdowns.
And, last year mid and small caps have given two times returns versus large caps. So, if the investor's time horizon is not 5 to 10 years, large caps can be preferred.
In the current market correction, which sectors look attractive and why?
Generally speaking, value stocks tend to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation. Specifically speaking, high inflation boosts the performance of financials, retail and real estate sectors. Strengthening of the dollar favours IT and other export oriented sectors.
As COVID has ended, and the economy has opened, the auto and consumer discretionary sectors look attractive too. One should stick to companies that command brand equity and consumer affinity because they will be able to pass on the inflation by way of price hikes; over time, inflation will reduce and increased prices will only boost margins of these companies.
So far the government has not deferred its LIC IPO launch plan. Do you think the Ukraine-Russia tensions-led brutal fall could delay the plan?
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Mostly geopolitical tensions have led to a fall of around 15 percent for indices, but this has not lasted too long, and is mostly followed by recovery over one to three months. The government won't delay the LIC plan for too long in my view. However, considering the brutal fall in the prices of recent IPOs and given the fall in markets and related investor sentiments, a deferred date for LIC IPO is definitely possible.
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