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Is your Portfolio Battle Ready?

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As Russia goes ahead with the war on Ukraine, financial markets worldwide are in a tailspin. Benchmark indices have tumbled in America, Europe and Asia in tandem. Bond yields are spiking as international oil prices surge to $100 per barrel and interest rates are all set to go up.

As an investor, you may wonder whether to go into a ‘risk-off’ strategy like everyone else or follow legendary American investor Warren Buffet’s philosophy to get greedy when everyone else is fearful. When there is uncertainty, the best thing to do is step back and wait for things to settle down. Rushing in to make some quick buck right now could be like catching a bunch of falling knives.

Many factors besides fundamentals drive the sharp selloff in the market. Foreign portfolio investors are worried about inflation in the rich world and adopting a risk-off strategy. It is not just Indian shares, but markets worldwide are witnessing a sharp selloff. Indian shares are particularly facing the heat as they outperform in 2022. Midcap and small-cap shares usually get hammered in such situations.

While you wait for the dust to settle down over the geopolitical tensions triggered by the Russia-Ukraine conflict, you may want to consider a few sectors that could give your investments hope. The advice usually is to stick to sector leaders in the so-called defensive segments like consumer staples and pharmaceuticals.

Technology services are one such segment that may seek your attention in the next few quarters with performance. The quarterly results announcements from the leading players like TCS and Infosys paint a picture of long-term structural opportunity resulting from cloud computing in the short-term and digital transformation in the long term.

So much so that the managing director of TCS, Rajesh Gopinathan told analysts at a conference call that there was an expectation of a rising pricing environment. IT services companies primarily focus on servicing clients in North America and major European markets. A key parameter is the pricing of contracts. For many quarters, technology services companies could not confidently say that pricing pressures have abated in conference calls. Infosys CEO Salil Parekh said that the company had seen some stability in pricing. The good news is that these companies do not have to cut prices to win business anymore.

The stock market has interpreted that over the past few months, IT services company shares outperformed the S&P BSE Sensex over the 12 months. However, there has been a sharp correction in the stock prices in the recent few weeks. Many market pundits speak about the need for foreign portfolio investors to sell as the primary reason and not the fundamentals of these companies. For business, Indian IT services depended on the capital expenditure planned by primarily the US Fortune 500 companies. The digital transformation wave across business processes has forced large companies to incur higher operating expenses. That would mean Indian IT services companies could get recurring business. That is as fundamental as it can get. Investors selling in a panic now are most likely to return to IT services companies again.

For those who missed the last opportunity in technology shares, the selloff right now could be a point of entry.  


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