EMs haven’t lost sheen yet; cherry pick stocks: Nilesh Shah

Emerging Markets (EMs) have been the worst hit in the last few days after indications of stimulus rollback later this year took a toll on global markets. However, Nilesh Shah of Axis Direct is of the view that EMs haven’t lost sheen yet and this gloomy sentiment is only a temporary feature, not a permanent one.

Shah says the CCEA hiking the gas prices to USD 8.4/unit is a positive for the sector as the gas based power plants, that were sitting idle for long, will now come back into production.

“What will be most important will be to see how State Electricity Boards (SEBs) absorb this additional power hike. With this new gas pricing, probably the gas based power plants will sell their electricity somewhere over Rs 5,” he adds in an interview to CNBC-TV18.

Below is the edited transcript of Shah’s interview to CNBC-TV18.

Q: What is your general sense of this whole emerging market (EM) gloom that has come about over the last fortnight? Do you think it is temporary or could the asset class really be loosing its sheen?

A: I don’t think it is temporary, it has long-term implications. However, at the same time I don’t agree that asset class is losing its sheen. We are going to see these kind of bouts of liquidity love and hate relationship with EMs. Right now, the fortunes of EM more in peer group countries than in India are on the way down. China growth is slowing down, Brazil is seeing an Arab Spring happening over there, Russia commodity price softening will always have a negative impact on them and things are not that bright in India, the way they were in 2007-2008. So yes, right now the EM trade is getting impacted because of events happening in the western world, but it is going to be little bit more than temporary but not permanent.

Q: The big news is with the gas price hike. What have you made of that in terms of an impact on the sector as also impact on sentiment because such a big policy move has finally come through?

A: Firstly on the IT space, the one thing that is impacting IT sector stocks is yesterday’s Accenture guidance. So, apart from immigration bill it is the guidance which is impacting IT stocks today.

On the gas price hike, the immediate benefit which will be factored in by the market but will be available to economy probably a year down the line, is that the gas based power plants which are sitting idle will come back into production hoping that this gas price hike will encourage investment and flow of gas. That territorial impact will be felt on many industries especially in southern states where power crisis is acute.

The second benefit which will come is for all stocks like Reliance Industries and Oil and Natural Gas Corporation ( ONGC ) and Oil India which is producing gas where because of the lower than market prices the stocks were taking a beating. Now, with this gas price hike the stocks have moved up already.

What will be most important will be to see how State Electricity Boards (SEBs) absorbs this additional power hike. With this new gas pricing, probably the gas based power plants will sell their electricity somewhere over Rs 5. Will SEBs be able to absorb this and not impact their financials, is something which the market will be watching over a period of time.

Q: What do you make of this complete collapse in the price of gold below USD 1200 per ounce internationally and the damage that it is inflicting on the whole ecosystem of anything to do with gold from Titan Industries to jewellery companies to gold loan companies, they have all completely collapsed?

A: In some sense these are two opposite forces which are working. The global correction in gold prices is more a function of dollar strengthening; it is more a function of less risk aversion as the global economies led by US has started stabilising. However, in India typically, lower gold prices should have resulted into higher gold buying and we did see fair amount of buying happening in the month of April and May. Our gold imports almost doubled in April and May.

However post May, government started taking several actions on controlling the gold consumption and along with drop in international gold prices even though rupee depreciated, gold prices have come down. So, a combination of these factors especially the government’s proactive steps on controlling gold consumption is resulting into gold stock prices coming down. And it is necessary from an overall economic point of view, that Indians stop consuming gold like they were consuming few months back.

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