A proper portfolio should have both banks & IT: Deepak Shenoy

“Longer term, the relative fundamentals of India should come through but in the short term, we do not have to brace for damage. In some ways, a little bit of panic selling is happening worldwide and we are not decoupled in any major way that way,” says Deepak Shenoy, Founder, Capital Mind.

How would you analyse the global set up for us? For the first time we are dealing with a weak currency, high yields and a proper fear of recession and then we saw a selloff. It was fear of inflation and now it is a fear of recession. Three months and everything has changed?
It seems like that but to be honest there is not that much fear of inflation in India because yields are only 7.45%. They were 7.05% about a month ago but then they were 7.4% two months ago. So, yields have not really gone up that much.

In fact, our relative yields compared to the US where two-year paper is trading at 4.25% or 4.3%. That spread has reduced because of reduced inflation expectations in India as well but right now there is a liquidity problem, a severe liquidity crunch in the USD and that is causing a lot more funds to go to the USD more in fear than in anything else. So while this is on, our market is going to underperform. I think longer term, the relative fundamentals of India should come through but in the short term, we do not have to brace for damage. In some ways, a little bit of panic selling is happening worldwide and we are not decoupled in any major way that way.

Has IT fallen enough to be bought again?
The markets seems to think so. We have seen the market rewarding some IT companies. IT for the rest of the year isn’t going to be that great. I would like to look at them from an economic standpoint in terms of earnings and prospects. Showing a turnaround after next year’s budget comes into play which would be in the month of Jan-Feb is when we will start seeing a little more allocations, a little more positivity in that sector.

Till then, it is going to be like there is a recession and we are going to lose some orders, some discretionary things will get delayed and so on. Next year onwards, Budget allocation should show a higher allocation to Indian IT, primarily because of cost but secondarily because there is a move towards outsourcing more work in a recession. If you want to look at the IT pack, think from a 3-4-5 year standpoint rather than immediately for the next three or four months.

What should one do? Look at banks where we see three years of visibility? It is a price challenge or look at IT where there is a yes-no, yes-no move?
I think a proper portfolio should have both. Right in the end, we will have some interest in the financials. Today the financials look better for the banks than they do for a lot of NBFCs. I would focus on the banks for the financial part of things. I would focus on some IT companies. In fact, I like largecap IT more than small and midcap IT.

Primarily from a growth prospective, I do not think the growth will be the same and some of them have cost pressures which will come about in the next one or two years.

So largecap IT looks good. I would say wait for your exposures accordingly. I have a very low weightage to banks in our portfolios and a slightly increasing weightage to IT. Come towards the end of this year. I hope to have a higher weightage for IT than banks in the portfolio. Right now, IT is relatively low. We are just still building positions.

You would not be looking at this Singapore GRM play would you? Or may be a Chennai Petro or an MRPL?
Right now, I think India’s basket is all wonky. There is still a lot of Russian crude. It is not as much as we were importing in May but there is some component that reduces our average cost. It is the export duty that applies. So a lot of the exporter influence over here; The differential may no longer necessarily come to our company. We had an investment in Reliance but none of the others.

I think crude is weak and is going to continue to weaken in the next few months. We expect at least inventory losses to occur to most of these companies. So, we are not very keen on building up large positions in any of the refiners here. The oil marketing companies may show a temporary 3-6 months kind of potential profit boost but given that they are PSUs, we are loath to play them because the government can come and ruin their financials and economics at any time. In short, I am not taking any bets on this side now.