portfolio allocation | investment strategy: rising oil prices, fears of stagflation? Here’s how to make your wallet less fragile

“I would say 65-70% of our Nifty 50 earnings are largely unaffected or have little impact, while only 30% of the earnings composition would be affected by rising inflation,” he says. Sampath ReddyNAMELY, Bajaj Allianz Life Insurance.



The concern in the market seems to move away from the war despite the fact that crude oil prices remain high. A new concern is what happens if growth slows and inflation remains stagnant, a kind of stagflation scenario. How does equities as an asset class fare around that? What are your thoughts?
Most markets around the world, including India, are above pre-war levels. That in itself clearly tells us that the market can withstand war and these cases.

In the last two years the economic growth was very weak due to the lockdown and most of the companies were struggling and despite all that and the very weak economic environment the markets did very well and the same thing happened with the last month. Even though crude is up nearly 20% from pre-war levels, markets are higher than pre-war levels. It means that some of these likely short-lived shocks to the economy can be absorbed by the markets as long as the cash flow and interest rate environment is very good.

So far, the flow of funds has been very supportive of the domestic market. Domestic investors have largely been net buyers despite the FII sell-off. Going forward, what’s important to note is that over the past two years, the Fed and other central bankers around the world have supported the stock markets or capital markets and the economy with a significant amount of liquidity and by keeping interest rates low. interest rates. The biggest factor to watch over the next three to six months is how this liquidity is withdrawn.

Given the type of inflation measures that we are seeing, I think it will have an impact on the markets. The Fed and the central bankers have kept the markets at these levels for the last two years and they are at such high levels that only the withdrawal of this liquidity will have an impact on the markets and not the war or the outbreak of the pandemic.

Due to the large size of your portfolio, I am sure you are very attentive to the development of macros, in addition to the business models of the company you follow. How serious could be this slowdown risk that the war may have triggered? How bad could it be on the growth front in your opinion in the next 12 months?
In the last five or six quarters, we have always been positively surprised by the earnings growth of Indian companies. That is clearly behind. The positive earnings surprise that we have seen in recent quarters is not going to be there.

With commodity prices rising across the spectrum, from the fourth quarter onwards, we will see margin pressure on most companies, but the good thing is that most of our profits come from the financial services, followed by IT services and then of course Reliance and the oil and gas sector. These three segments, despite this pressure on margins, may not have much of an impact on the current slowdown or commodity-driven inflation.

The only sector that could have an impact on earnings is consumer or consumer discretionary companies, automobiles and other manufacturing sectors in general. Steel and cement will see margin pressure, but the composition of these sectors in the overall index and the aggregate level of Nifty EPS is not really much. I would say that 65-70% of our Nifty 50 earnings are largely unaffected or have little impact, while only 30% of the earnings composition would be affected by rising inflation. We are relatively less affected in terms of earnings, the positive surprise that we had seen in recent quarters is not going to be there. Most general manufacturing companies will also face margin pressure in the fourth quarter and first quarter of next year. That is worrisome.

This is not 2013 when the market was taking off, nor is it 2016-17 when small caps had a 24-month hot run until 2018. What should the portfolio look like and what selection strategy are you following to make your portfolio anti-fragile? in the future? next 12 to 24 months?
Crude alone appears to be the biggest risk to Indian corporate earnings. That will have an impact on inflation in India and will also have an impact on margins in most manufacturing sectors. As I mentioned, most of our earnings are relatively less affected by current inflation driven by commodities, especially aluminum and steel. We are net exporters there and we have fully backwards integrated companies. There you could only see the positive impact.

In India, the situation is not so worrying. Despite the war and despite crude oil being 20% ​​higher, we are above pre-war levels, which is largely due to the composition of earnings and not only that, the biggest concern for markets going forward is how global liquidity will withdraw and generally what impact it will have on PE multiples and valuation.

From a sector point of view, we still like metals as a segment. At current prices, most companies in the metals sector are generating 12-month free cash flow roughly equivalent to 25-30% of their market capitalization. Therefore, they are quite attractive as free cash generating companies. They are using this cash to reduce balance sheet leverage.

IT services are once again one of the strengths of the Indian markets which, with the depreciation of the rupee and strong demand, remain relatively unaffected. The BFSI sector is relatively unaffected by commodity-driven inflation.

The top four or five banks in the sector are very well capitalized and very well positioned to capture its growth. So there are good opportunities to invest despite the volatile times and the overall market valuation could come under some pressure in the next three to six months, but from a longer-term investment standpoint there are ample opportunities.

If market volatility continues over the next six to eight months, where would you like to build your positions, increase your weights?
Largely IT, metals and BFSI space. These are the segments where we have most of our investments. Pharma is also a sector that we have liked for quite some time. We will also be looking at some of the small and mid-cap themes where we might find growth opportunities, such as electric vehicles. We are looking for moves between component suppliers or OEMs.

I want to know a little more about your portfolio strategy in engineering and capital goods, basically manufacturing, not only for the domestic market but also for export. Is value-added manufacturing and engineering in China plus a strategy working well?
Even on the engineering side, there are quite a few multinational companies. Fortunately, most of the MNCs that are present in India are on the list and offer a very good opportunity to participate in the capex story. Most are small caps, be it KSB Pumps, AI Engineering or Linde. A host of multinationals listed in India for legacy reasons offer an attractive way to play out the capex recovery cycle.

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