Shouldn't worry about 1-2% decline at index level, all this is temporary: Deepak Shenoy

Time of India

4 days ago

Deepak Shenoy
, Founder & CEO,
Capitalmind MF
, says despite market dips driven by
financial sector concerns
, fluctuating government spending, and initial job losses from new technologies, the economy appears fundamentally sound. While acknowledging short-term anxieties, Shenoy anticipates a
market recovery
as these temporary issues subside and
government spending
resumes. The underlying economy's strength should ultimately be reflected in market performance.
What are you making of mayhem that we have seen in the market recently because key support levels have been broken on an intraday basis on consecutive days. Any scope of a recovery now?
Deepak Shenoy:
There is always scope of recovery, no matter what. One of the things that is probably weighing in right now is the lack of a deal with the US. Europe's deal with the US is also hanging while Japan and a few other countries have made deals. So, there is a lot happening and it is generally very good. What we call volatility is like 500 points in the Nifty here and there, that is just like 2%. If we do not move this much, where will we go?
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Honestly 1%, 2% is not a big deal on the index level. Of course, some stocks are reacting to earnings, some stocks are reacting to generally low credit growth overall, though to be fair, the economy seems to be growing quite decently. We will get numbers at the end of August about GDP, but in general, I do not feel that the economy is meaningfully in trouble or any of that sort. The results seem quite okay other than from some of the financials in the sector and even there, there is a good and bad.
Overall, we are not seeing miserable results in that sense, but we do see some elements that are concerning whether it is government flow in defence orders, changes in the infrastructure story not panning out quite as much as we thought, and while some of the other areas around it does cause a short-term risk or a short-term fear level. However, I do not see this as long-term. All of these things will go away. The government will spend, they have to, and even the concerns around jobs will recede. Every new technology creates jobs and takes away jobs, and usually takes away jobs before it creates jobs. It is just a part of the game. We have seen this 20 years ago and we will probably see it now as well.
I do not think the numbers are meaningful. Although numbers like 12,000 (job cuts by TCS) sound huge, it is on the back of a six lakh workforce, so again, small single digits overall. So, yes, there are fears, maybe some of it is driving down markets in terms of sentiment, but once some of these go away, we should see the markets recover somewhat and reflect the underlying economy a little more.
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Let us talk about the banks' earnings. Yes, there is the good and the bad, but the unfortunate part is that the good is few. ICICI Bank and HDFC to some degree are at a dominant position and then there are the rest. From Kotak and Axis we heard that there is a problem in the MFI segment, Kotak especially. The MFI segment for them is minuscule, and for them to come out with the commentary that they have, does it indicate some problem when it comes to
unsecured lending
and it is not going to bottom out soon?
Deepak Shenoy:
Honestly, that has been a long time coming. Early last year, RBI started saying that they want to curtail NBFC lending to the unsecured sector and then downstream into banks as well. One of the problems that we have seen in general is when you are very harsh on one sector and say I want to stop all lending, it is not only the bad borrowing that goes out the window; the good one also goes. What happens is banks and NBFCs start placing a lot of restrictions, and increase interest rates. Interest rates have gone up and we have not seen a major cut in the interest rates for even unsecured loans and therefore, we are not getting good borrowers back into the system.
Then, if there are an increasing number of borrowers who are in some kind of stress, the less stressed people are choosing to repay their loans and not borrowing anymore because banks have increased requirements, made it onerous for people to apply because RBI was strict, and so obviously the share of your bad loans will go up. They are being fair in saying that there is stress but RBI has removed a lot of the harsher mechanisms and have eased up on the regulations a little bit.
Secondly, it takes time for some of these things to seep back into the system. So, borrowing even by corporates is not going up. The corporates are going to bond markets, getting better rates from there. Some of the SMEs are choosing to repay loans even though it may hurt their ROEs. All of these are signs that the banking system perhaps has gotten a little more strict than it should and they should ease up. If banks wanted, they could increase lending by reducing their rates. I do not know why they are not doing that.
They are all quoting credit costs as if just because they have some bad borrowers, they have to charge everybody higher interest rates. But that does not sound altogether sane. You do need to reduce interest rates for people to borrow better and for better borrowers to come into the system. At this point, banks have themselves to blame to a large extent and it is not that all banks are bad. Some people are doing well in this market and you will have to have some of the bigger banks take the lead in cutting rates for borrowers.
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