IT, oil & gas producers among few hedges amid global market turmoil

Metals and pharma stocks too stand to gain, but higher input costs and supply chain disruptions are potential headwinds

Asian markets crashed after the Russian invasion of Ukraine, and Frankfurt, London, Paris are down over 3 per cent. Russia is also down. Currency markets saw a flight to dollar safety. Commodity markets are in turmoil with crude and gas prices spiking to multi-year highs. Gold prices have also hardened.

There could be relief rallies if there’s a ceasefire. In the worst case scenario, the conflict will escalate with NATO drawn in. In the least case, sanctions will lead to slower global growth. At the minimum, we can expect certain trends to continue.

Energy prices will remain elevated. Metals prices may also remain high, since Russia is also a major producer of industrial metals. The EU will be hit by the need to source alternative higher-priced gas. Investors will prefer low-risk hard currency assets like US treasuries.

As a huge energy importer, India faces a rising trade deficit. That’s downwards pressure on the rupee. FPI selling is likely to continue and may increase in volume. That pulls down equity prices and hits the rupee again. The RBI’s substantial forex reserves could be significantly eroded, since a lot of it consists of “hot” FPI money.

Domestic inflation is high, and will be stoked by higher fuel prices, which feed into higher transport costs and power tariffs. There could be supply disruptions in areas such as edible oils, since India imports from Ukraine and Russia. The government may be forced to cut excise and cess on fuels, which means revenue estimates go awry. Global trade including exports from India may slow.

In technical terms, the Nifty broke its recent December lows of 16,400 on Thursday and this pattern of lower lows sets up a potential downside till 15,000. A complicating factor is that Indian equity valuations are higher than peers, which makes Indian stocks less attractive to value-seekers.

There are a few possible hedges. Apart from gold, and short rupee-long USD positions, equity investors could seek a few counter-cyclicals.

In energy, oil and gas producers like ONGC, Oil India and Vedanta could be gainers. Vedanta’s metals segments may also benefit from higher demand but it will have to cope with higher power costs. Coal India may gain since global prices are up and likely to rise. Other metals producers in non-ferrous metals such as Hindalco, Nalco, etc, may see demand rising but they’ll have to cope with higher fuel and power costs and possible disruptions of logistics.

The refining and retail marketing companies like BPCL, HPCL, IOC, etc, will suffer margin compression and as PSUs may be exposed to under-recoveries. The gas distribution and transportation segment will also be under pressure. Reliance Industries is difficult to evaluate. It has some production, a lot of refining and petrochem exposure, and several other divisions such as digital, retail, etc.

Exporters should gain if the rupee falls. But industries such as pharmaceuticals may suffer from higher raw material costs, potential supply disruptions and higher transportation costs. Textiles could see lower demand. 

The IT sector could be the biggest beneficiary of a lower rupee. Demand for digitisation remains high, and while IT has seen margin compression and high employee churn, most companies are confident of new deal-wins in FY23. North America is likely to remain the growth hub for IT.

The bigger IT companies are more likely to weather the inevitable turmoil. Although the Nifty IT Index has fallen as much as the Nifty50, corporates like TCS, Infosys, Wipro, and L&T Infotech could all recover quicker than the overall market and be reasonable hedges.