India is a highly energy-dependent country. The recent crash in the price of crude oil by 30 per cent to $90 a barrel has changed a lot of things. I hope this is more permanent in nature and not temporary. India will see coal imports rise, but coal prices, too, have fallen. The world is also saying we cannot bear high energy and commodity prices. Somewhere in the commodity markets, a fundamental change has taken place. From a sellers’ market, it has become a buyers’ market. Part of it is also because of large discoveries of shale gas in the US.
This will lower India’s import bill. It will also have an impact on inflation for us, given that a lot of it was because of higher energy prices. Once the pressure on current account deficit eases, pressure on the rupee should also subside, with a lag effect. The rupee, currently around 57 to a dollar, should probably rebound to 52-53 levels.
The current trend though, indicates a complete disconnect between the rupee and collapse in commodity prices, partly due to geopolitical issues and partly to India’s internal issues. The situation, however, should correct at some point in time and reflect the change (improvement) in fundamentals. I think we are closer to the bottom for the rupee.
Stock market valuations are also reasonable and near the bottom. On the political side, after the presidential elections we should see a new finance minister and new Cabinet ministers. Things could be better than in the past few months. I believe investors should start looking at stocks.
Themes that should do well include financials. It’s difficult to time the next rate cut but as lower commodity prices feed into the system, it will show up in the inflation index. For instance, at current levels there is an over-recovery of Rs 6 per litre in petrol prices, which will reflect in the index once these are cut. Once inflation comes under control, and for whatever reasons, over the next 24 months we should see significant decline in interest rates. In that context, financials, currently available at around one time price-to-book value, are safe bets and investors should get above- average returns. The automobile sector, which is very sensitive to interest rates and fuel prices, also looks good.
Small consumer companies are attractive as well. The consumer boom in India will be much bigger than what we have seen in the last five-six years. Prosperity levels have reached t such an extent that people are not willing to sacrifice on daily consumption items. So, the moment the economy revives, people will start consuming durable products. The consumer boom, which I believe will continue relentlessly for the next 10 years at least, will be wonderful for consumer companies.
Broadly, though, what’s essential is that investors start building a quality portfolio. Given that markets are subdued, even good stocks are quoting at reasonable valuations. On the flip side, one of the key risks India is facing is the monsoon, which could be a bit nasty. It could have some short-term jittery effect as well as implications on rural demand. Globally, there are a lot of risks, which are difficult to predict. While India will also feel the heat of any global slowdown there are gains, too, given that we are a net importer of energy-based products. Thus, investors should focus more on domestic consumption stories.
The author is co-founder and joint managing director, Motilal Oswal Financial Services