Cautious on valuations, bullish on insurance and IT: How Nilesh Shetty is positioning for the next 12 months

As Indian equity markets reacted to hopes of a Middle East peace dividend, portfolio manager Nilesh Shetty of Quantum Advisors urged investors to look past the rally. With El Niño risks, possible IT job losses, and unabsorbed cost increases weighing on corporate margins, Shetty believes a negative earnings surprise is possible over the next three to six months — and that current valuations have already run ahead of fundamentals.

Despite the macro caution, Shetty is finding value in specific pockets. Here's how he is positioned across key sectors.

"There is a negative surprise on earnings possible over the next three to six months, and valuations perhaps have moved a bit ahead of that," says Shetty.

Sector Snapshot

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Shetty holds a large position in both general and life insurance companies, describing the sector as having gone through years of regulatory and distribution headwinds. With most companies trading between 1x and 1.5x price-to-embedded value, he sees a three-to-five year structural opportunity. His preference is firmly for private sector players over state-owned LIC, citing concerns about underwriting discipline and risk controls in public sector companies.

Private banks: 20-year low valuations demand patience

Private sector banks remain one of Shetty's largest holdings. He notes they have been the biggest underperformers since the post-Covid rally — even as their book values and earnings have grown. The trigger he is waiting for: a pick-up in credit growth, which he believes could unlock a significant re-rating in the sector.

IT: Betting on legacy and the AI opportunity at a 5% dividend yield

In a contrarian call, Shetty is incrementally adding to large-cap IT stocks. The sector has been materially derated, with several top-tier companies now offering dividend yields not seen in over two decades. His thesis: enterprises will never allow unchecked AI-generated code into production systems, ensuring that experienced IT service providers remain essential for security, maintenance, and system modernisation. He expects near-term revenue deflation from AI productivity gains to be offset over time by a broader expansion in IT budgets.

"No enterprise is ever going to allow a vibe-coded software to be plugged into their systems. You need a service provider for security, maintenance, and upgrades — that's what AI cannot replace, " says Shetty.

He is sticking to the top four IT companies in the value chain, arguing that only they have the balance sheets, domain expertise, and scale needed to integrate AI effectively. Mid-cap IT names like Coforge, Mphasis, and Persistent — despite having individual niches — still trade at valuations that have not corrected to levels he finds compelling.

What he's selling: metals, autos, and power stocks

Shetty has been trimming positions in sectors that have had strong runs. Metals, which he had accumulated during a period of balance sheet stress, are now being reduced as commodity prices have risen to levels that attract new competition and capacity. Auto, a large position through 2022–23, has also been cut after a 24-month rally. Power stocks, trading at three times book despite single-digit growth, strike him as overvalued by any reasonable historical measure — and vulnerable to a sharp correction if any negative event materialises.