The ongoing war between Israel and Hamas, which began on October 7, remained on top of market participants’ minds through the week. After falling more than 450 points in a knee-jerk reaction on Monday (October 9), the benchmark equity index BSE Sensex settled 0.43 per cent, or 287 points, higher at 66,283 for the week ended October 13. Meanwhile, the headwinds pushed crude oil prices higher by 3.5 per cent in the past five trading sessions. Will the continuing geopolitical confrontation between Israel and Hamas bear any influence on the Indian markets? Also, what would be the best strategy for investors?
Anand Shah, Head-PMS and AIF Investments, ICICI Prudential AMC, in an interaction with Business Today said it is too early to predict the outcome of the conflict and its long-term impact on commodity markets, but it will be safe to assume that in the near term energy prices will remain elevated. Given that the world is already dealing with inflation, this will be an additional burden on countries that are susceptible to imported inflation.
“The long-term impact of the Israel-Hamas war on Indian equity markets is likely to be muted. However, in the short term, given India’s high dependency on oil and gas, this may be marginally negative for the Indian economy and equity markets. Whilst in the medium term, if the conflict escalates, and if energy prices remain high, it could keep inflation levels high leading to higher interest rates for longer. Elevated inflation for longer can potentially depress equity market valuations globally,” Shah said.
Asked what strategy one should adopt amid the ongoing geopolitical tensions and state and general elections in the coming months, Shah added that the impact of geopolitical tensions and elections have always been transient and they have no bearing on the long-term performance of broader markets.
“We advise investors not to alter their investment strategy and stick to one’s own asset allocation strategy with discipline. The macro events may impact prospects of individual sectors and/or companies and thus we as active fund managers would have to adjust the portfolios accordingly,” he added.
Shah remains positive on select manufacturing, manufacturing-allied businesses and banks. On the other hand, he is underweight on select consumer, technology and pharma businesses.
“The capital-intensive businesses (which are also cyclical in nature) went through challenging times from 2010 to 2020. Their profitability dipped due to low pricing power and high leverage (debt to equity) as they came out of the 2003-11 capex cycle. Since then, the leading businesses within this space have not only fixed their balance sheet but have also improved their competitiveness. From here on we see that they will not only benefit from their business restructuring but also cyclically benefit from lower competitiveness. This is likely to lead to better pricing power resulting in higher profit growth and superior ROE,” Shah said.
Of late, ICICI Prudential PMS Contra Strategy, which has completed its five years, managed to deliver around 20 per cent CAGR return to investors since September 2018. The figure shows the strategy has turned a lump sum investment of Rs 1 crore to around Rs 2.4 crore during the same period. Sharing his view on the success of the strategy, Shah said their call on companies in sectors like manufacturing (metals, industrial products, and auto ancillaries) and manufacturing allied (logistics, corporate banks, and utilities) which are coming out of tough macro cycle contributed to the strategy’s success.
“Revival in earnings in all these sectors aided the portfolio in generating a reasonable alpha over its benchmark. This was primarily due to the investment framework (BMV) set in place to identify resilient businesses which can offer better growth potential at reasonable valuations. The portfolio also benefitted from businesses that have high entry barriers, sectors that are in the consolidation phase or companies that are in a special situation,” he said adding banks, ferrous metals, telecom, finance and transport services form the top five sectors of the portfolio at present.
Commenting on the ongoing Q2 result season, Shah said the overall earnings growth to be driven by select cyclical, industrial and capital goods players which is a key positive from our standpoint. A few sectors could report strong numbers albeit on a low base. The delayed festive season could weigh on the margins and profitability of consumer-facing companies.