IT stocks to recover if there's no slowdown in the US: Krishnan VR
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Indian IT stocks have faced significant pressure this year, with the sector's index among the worst performers over the past three years. In an interview with ET Markets, Krishnan VR, Chief of Quantitative Research team at Marcellus, discusses how concerns over US tariffs and a potential slowdown in client spending are already reflected in valuations—and why a recovery could be on the cards if the US economy holds steady.Edited excerpts from a chat:We have not changed our investment style. We prefer to invest in clean, well-run businesses with strong balance sheets, returns on capital greater than cost of capital for long periods of time, and available at reasonable valuations. The rules-based investment approach in MeritorQ also makes it easier to stick to our regular investment objectives, without being swayed by short term volatility and news flow.Within equities, we are cautious on small and mid-caps allocation as index valuations in the space are still above historical averages, especially, after the recovery we have seen over the last one month or so. At the start of FY24, MeritorQ had significant allocation towards small and mid-caps, which worked in our favour. Over last year, however, this allocation has come down progressively. At this point in the market cycle, I think it would be prudent to be more defensive.As of now, we remain fully invested in MeritorQ. Taking cash calls requires one to time the market right twice, which is difficult.I think on fundamentals alone the broader financial services sector presents attractive opportunities in insurance, wealth management etc. where we are seeing the structural trend in financialization playing out. Our investing style remains sector agnostic though.Don't think so. Lets remember that both IT services and pharma are not directly affected by the first round of tariffs announced by the Trump administration till now. In IT services, fear of slowdown in discretionary client spending due to the inflationary effect of the tariffs and impact on US growth, is already priced to some extent. IT index is down in double digits this year and among the worst performers over the last 3 years. If the US does not experience a tariff induced slowdown in the latter half of the year, I think there could be a case for recovery in IT stocks. In pharma, it is difficult to see how meaningful tariffs, particularly for lower priced generics, can sustain as those will drive higher outlays for US patients and potentially drug shortages. Also, if pharma tariffs are applicable for all countries, Indian pharma companies could have an edge given their cost advantage and regulatory track record and could very well be the last ones standing.If US inflation increases due to tariffs, then treasury yields could stay elevated, potentially dragging down EM flows. Markets hate uncertainty so in case of a full blown trade war, I think India could be a potential beneficiary especially if we are able to work out a bilateral trade deal with the US ahead of other major economies.I think corporate earnings and outlook would be among the key drivers for equity markets as we enter FY26. However, investors should keep an eye on any structural trends from second and third order impact of tariffs and domestic consumption slowdown.
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