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Using correction to rejig portfolio, but buying very slowly: Deepak Shenoy

Jun 14, 2022

Synopsis

“Right now, we are just seeing damage across the board and I would love to call it an opportunity but looking at the way the stocks are going right now, I think there are going to be more opportunities ahead. We are focussing on largecaps but as things get more attractive and we get visibility, then we will add more midcaps.”

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“When investors in the West who had access to free money for a long time find that their money risk free can make 3-3.5-4%, they are unwilling to take the risk of say an emerging market and are moving their money to the safest avenue which is the dollar and therefore treasury bills,” says Deepak Shenoy , Founder, Capital Mind. The market fall in a way is good. If there is poison, shouldn’t it get out in one go? I hope you are right. It is better to get a steep and a shorter duration fall than to see the world kind of go down slowly. We have seen this since October and it looks like we are seeing some level of capitulation now. However, times like this do not end unless there is some really bad news in terms of a large or leveraged player falling or going bankrupt. I think that would be the real point at which all of this will come to a close.

But right now, we are just seeing damage across the board and I would love to call it an opportunity but I think there is going to be even more opportunity ahead, looking at the way the stocks are going right now.

Chris Wood the other day was calling 14k on the Nifty. We already know inflation is a reality and interest rates are going to go up. What is spooking the market then and where is the money that is getting out of global equity markets? To some extent the US dollar. The US dollar was more than Rs 78. The Euro, the UK Pound and even the Swiss Franc and even the Japanese Yen are at two-year lows in comparison to rupee. It is cheaper to import from all the countries that we do import from.

We do not import much from the US, we mostly import from everywhere else. So in dollar terms, it is more expensive but in Euro or Japanese Yen or in UK pound terms, it is lower.

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The money that is going away from the equity market is going either towards the dollar or literally without the Fed printing and perhaps some kind of a stoppage of this from the ECB also, we are seeing that money crunch is raising government bond yields in the West.

When investors in the West who had access to free money for a long time find that their money risk free can make 3-3.5-4%, they are unwilling to take the risk of say an emerging market and are moving their money to the safest avenue which is the dollar and therefore treasury bills.

That is happening and until a risk-on time frame comes back, liquidity is going to be a challenge. We will have to hope for earnings to make up for people to find valuations attractive before liquidity comes back.

What is the sense when it comes to the IT basket? Tata Group’s N Chandra for instance is painting a fairly gloomy picture. Does that make you a lot more circumspect on IT? Well in a short-term perspective maybe, but longer term things are going to look better because the inflation in the West is not food and fuel driven in the sense their WPI or CPI indices are not so much about food and fuel, they are more about wages and housing and stuff like that.

If you increase wages to a point where it is unaffordable to hire people in those countries, they will outsource. If they outsource, Indian outsourcers are looking for and are winning deals and some of these deals are much larger in size now than they were earlier.

So if you take away the short term pain, in the medium-term things should look much better for the IT companies. However, I still am going to focus on the largest ones. The mid tier companies were trading at maybe 50-60 times earnings in the recent past and those corrections are yet to happen to a point where a 14-15% EBITDA margin company should not trade at perhaps more than 18 to 19 times earnings in general.

So when that correction happens, the midcap IT gets more attractive. Right now, it is only largecap IT that sounds attractive even at relatively higher valuations. I expect everything to cut across the board but the business should start recovering towards the latter half of this year.

You are not tempted to buy this fall then or are you even keeping a shopping list ready? We are buying, but very slowly. We know one might want to accelerate buying in these kinds of corrections but one should always be in a position that says I have always got to have something to buy.

We have generated some cash in the past, now we are deploying much of that. In the coming days, we are just focussing more towards largecaps but as things get more attractive and we get visibility, then we will add more of the midcaps. For the most part, we are avoiding smallcaps for now. Now the problem really is can one ever say that one is no longer buying at all? I think I will do that when I run out of cash. We have not yet run out of cash and so we continue to be buyers.

We are also selectively selling some of the overvalued stocks or those where we feel the valuations are not likely to go back to the earlier levels. We are re-jigging the portfolio.

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