- Downstream firms price in high oil prices, upstream firms price in low oil prices
- Contrasting valuations suggest owning the entire oil and gas sector basket
- Oil and gas sector could perform well given current volatile prices and tensions
“It is a strange situation where downstream companies are pricing in elevated oil prices, while upstream companies are pricing in low oil prices,” Abhishek Singh, senior vice president (SVP) and Fund Manager at DSP Mutual Fund, said.
Singh told NDTV Profit in an exclusive email interview that the contrasting valuations within the oil and gas space make a case for owning the whole basket rather than picking a side.
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Upstream names such as ONGC and Oil India are engaged primarily in finding and producing crude oil and natural gas, while downstream companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are exposed to refining and marketing of petroleum products.
“Oil prices and the Middle East war scenario have been so volatile that markets have almost become numb to the noise and headlines,” Singh said. “One has to take the view that the situation will eventually settle.”
Singh said oil and gas as a sector could do well, given the valuations. The contrasting expectations being priced into upstream and downstream companies, in his view, make a case for owning the whole basket rather than picking a side.
On interest rates, Singh said India is probably at the end of the rate-cut cycle, although a rate hike may not be seen any time soon unless global central banks, particularly the US Federal Reserve, start raising rates.
However, taking a 12-month view, investors also need to consider what happens if rates do rise, he said. Any correction in commercial real estate as a result, particularly in REITs, could offer an attractive entry point.
Singh also said he did not expect the recent outperformance of mid- and small-cap stocks. His belief had been that large caps, given their supply-chain and balance-sheet strength, would manage volatility and disruptions better.
However, SMID earnings delivery has been better, albeit with some caveats around the quality of those earnings.
As global uncertainty continues, Singh said individual investors should focus on diversified exposure rather than trying to time rotations between market segments. He favoured taking diversified exposure across a few good managers and allowing them, over full market cycles, to manage such transitions in a tax-efficient manner.
“The tax aspect is underrated,” he said. “A rotation that you execute yourself can result in a capital gains tax outgo every time.”
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