Market is down less than 10% from peak, but Deepak Shenoy has started buying preferred stocks

Deepak Shenoyfounder, Capital MindSays some of the shares he wanted to buy are down 30-40%. They have been able to buy some defense stocks, rejig some defense and manufacturing portfolios but have not been able to meaningfully buy on behalf of any clients yet. They have some auto exposure that has now improved itself a bit so they have some options. After November 15th when all the results are in, they will take a final decision on some of the areas we want to enter.

On bad global days, we fall because global markets are down. We are not going up in good global days. My question is why are we suddenly underperforming global markets? Is it a number? Is it FII selling? What is the root cause?
Deepak Shenoy: Last month we had Rs. 100,000 crore plus, Rs. 114,000 crores in sales and that’s just in August. Of course, they paid Rs. 20,000 crore Hyundai purchase so it is Rs. 90,000 crore will appear as So, that is probably one of the reasons that is stressing the markets. It is not a big problem because we are down 7-8%, we are not even 10% down from above. Such a large sell-off would otherwise have seen much deeper losses in the market earlier. It is also a fact that last year and the year before that, we have done well compared to the global markets. So, there is some form of mean reversion.

Finally, the results this quarter have not been very exciting. I don’t see anything big. Among the auto manufacturers, we have probably seen an increase in one of the four-wheeler manufacturers. Two-wheelers have done reasonably well. Some agri commodities and agri inputs have done well, but apart from financials, some industries are also more or less disappointing in terms of returns.

It’s also played into the spirit and then you have these big events happening. So, we’ve got Iran-Israel, we’ve got the American elections. Once that passes, global policy will stabilize, giving us a sort of indication of the way forward. I don’t see this as a big problem. We are just under 10% below the peak. I don’t think we should worry too much.

Have you started shopping at the market?
Deepak Shenoy: Yes, after all, some of the stocks we want to buy are down 30-40% upside. I can’t reveal too much right now but we’re adding more names that we’ve had very few of in the past because they’ve grown so much. So, we have been able to buy some more defense stocks, realign some defense and manufacturing portfolios. We haven’t meaningfully bought any consumer names yet, but we do have some auto exposures that have now refined themselves a bit so that gives us some options.

So, picking piece by piece, wait for the rest of the results. After November 15th when all the results are in, we will take a final decision on some of the areas we want to enter.

What is it that you wouldn’t touch in this market, even if it’s on the decline and whatever you’ve already exited in the last month, month and a half?
Deepak Shenoy: One of the things we have slowed down or not had much exposure to is NBFCs and certainly microfinance. NBFCs that have exposure to large amounts of unsecured personal loans, credit card companies and indeed one, so there is nothing else that makes sense. But as far as microfinance lenders are concerned, the point is that when the RBI controls new lending and starts talking to people, the first thing that happens is that people who take loans either have their loans with the same provider or through a different NBFC. renews and then when they are not given an opportunity to do so because the risk weight has gone up and the RBI has kind of taken over certain players, what actually happens is that defaults start to mount.

We see it in the numbers. Everyone talks about stress. So, that’s an area I’m currently avoiding, although I think the big banks have a more diversified portfolio and more room to work. They are currently a better play than NBFCs and microfinance players. But it may soon come to a point where the worst sort of goes after them and then they’ll be worth little enough for you to be able to go into recovery. So, it’s an interesting point where I would say don’t buy them now, but they may come to a point soon where they’re worth buying, worth the risk reward.

Now how do you approach investment stocks because government spending is low, but the signals we are getting from the government is that they are committed to spending and they want to meet the spending targets, which means the next three to six Big government spending should come out in the month, be it roads, railways, cement, steel, everyone will benefit. Is there a trade in cyclicals and capex now?
Deepak Shenoy: It should happen this quarter because we were expecting it to go up in the last quarter because the budget came, you got out of the election rut, the election spending, the first quarter spending was low because of the election. Second quarter is ok. In the third part we will get a large amount of expenses.

Usually there is not much spending in the fourth quarter because the government wants to spend only what it has already budgeted for. So, we will get a little faster spending this quarter and maybe a little bit more next time. So, most industries, especially those that do capex in that format, will start to improve. What will come next is credit growth for industrials, which has not really happened in a meaningful way yet. But it is starting to happen, we are seeing early signs of it. Therefore, we should see an increase in bank lending to the industrial sector.

Regardless of what the budget looks like due to geopolitical concerns, we should start seeing more of these orders flow in terms of completions and defense capitalization will take over in the next few months. I think that would be a good area to look at from a capex perspective. The value of some of them is very rich, so you have to be very careful what you buy. But for the long term, there is a lot of scope here.

Government spending will fuel some portion of the capex. Private capex has not really taken off in a meaningful way so far, but it is starting. You are looking at semiconductor based capex. We’re seeing a bunch of other areas start to pick up. So, think that you are watching the paint dry, it will happen slowly, it will happen before we know it and therefore, it is useful to take stock now and get ahead of this. We have a lot of players in the space and hence we are very biased on capex and infrastructure.

Is it L&T? Is it a road company? Is it railway because the word capex means everything.
Deepak Shenoy: it does. In fact, it would be good to approach many things. When you look at core infrastructure, be it roads, ports, airports, these all have their players. If you look at infrastructure from a digital perspective, there are also many players who provide services for stock markets, companies, insurance companies and insurance players etc. Therefore, each of these players will perform well in different parts of the game.

Defense and auto are the primary recipients as they are relatively large employers and contribute in a way to the country’s security in terms of self-sufficiency. So, they will focus on the country, no matter what. But anyway, going forward there will be action in this area because if Trump comes, there may be tariffs, counter tariffs on Indian companies. For example, the 100% tariff we have on foreign imports greatly benefits auto companies. It can be negotiated or worked around. So, there’s a lot of things in flux, but here’s where you want a little bit of each of these pies sitting in your book. I don’t think I’ll bet on just one of them because they’ll all do well, but at different times over the next few years.