Time correction, reshuffle to play in mid & smallcaps

The strong bull run over the last one year in the broader market has led to a surge in the valuations, concerning market regulators. However, Tailwind Financial Services does not anticipate any sharp correction in this segment.

“Like every bull market, there are segments that have driven this performance, and, hence, there are pockets where there is froth built up,” said Rishabh Goel, Managing Director at the financial services intermediary firm.

In the mid- and smallcap segment, Goel expects a combination of time correction, along with a shift towards pockets where valuations are still reasonable. Edited excerpts from an interview with ETMarkets:

What’s the fate of mid- and small-cap stocks after the recent stress test results released by AMCs?

Rishabh Goel: The stress test exercise has more to do with precaution than restraint. It equips investors with more information to aid their portfolio diversification approach.

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In the immediate aftermath, it does put the spotlight on schemes with high AUMs and their ability to manage liquidity events.

Hence, we have seen some action towards funds restricting large inflows, which should help achieve SEBI’s objective of putting in place stronger risk practices as overall inflows continue to remain strong.

There’s a lot of hullabaloo over whether valuations of small-cap and mid-cap stocks are stretched or not? Which side of the argument are you backing?

Rishabh Goel: Broader markets have seen a strong bull run in the last few years, leading to valuations running up.

Like every bull market, there are segments that have driven this performance, and, hence, there are pockets where there is froth built up.

However, we do not expect a sharp correction, rather a combination of time correction as earnings catches up to valuations over the next couple of quarters along with a shift towards pockets where valuations are still reasonable.

After mid-cap and small-cap funds, SEBI has now asked MFs to stop accepting inflows in ETFs investing overseas. Why is the alarm sound getting louder? Should one worry?

Rishabh Goel: The order to pause international ETFs is based on the limit set by RBI with the objective of managing currency stability.

There is no need for investors to view this as any concern or read too much into the restriction.

How does FY25 look for India Inc from an earnings perspective and investment opportunity?

Rishabh Goel: The Indian economy has been on the rise amidst a difficult global backdrop.

A combination of fiscal and monetary prudence, government spending towards an infrastructure push along with reforms like PLI have contributed to a positive outlook for India Inc’s growth prospects. So, FY25 is similarly expected to see strong earnings growth and help support valuations.

Which are the domestic themes that you think aren’t still overdone and hold potential to do well in the near future?

Rishabh Goel: With the expectations of the current government continuing for another term post the upcoming general elections, focus will be on infrastructure, defence, and power sectors as capital expenditure support in budgetary allocations continues.

To avoid traps, it will be essential to monitor valuations. Further, the banking sector has been underperforming, and since asset quality appears to be robust, a rate cut may cause the pressure on NIMs to lessen and the underperformance to reverse.

Finally, IT services were expected to be negatively impacted by predictions of a potential recession in the US economy.

However, due to their strong performance, those worries have subsided, and as interest rates are forecast to drop, IT may be the industry to gain from a robust US economy.

Currently, in which segment of the market is the risk-reward favourable and are offering long-term growth opportunities?

Rishabh Goel: We have been maintaining that the largecap segment has underperformed the broader markets for some time now.

Valuations are close to historical averages and provide comfort for allocation as medium to long-term growth expectations continue to support. With the US Fed maintaining three rate cut expectations over the year, we expect FII flows to help further drive largecap performance.

Despite the concerns surrounding the broader market, do you think India can outperform its EM peers in 2024 as well?

Rishabh Goel: The Indian economy has stood out along EMs in the post-Covid period. This is also seen in India’s growing weightage in the MSCI EM index.

Even as broader market valuations trade above historical averages, the large-cap segment provides attractive avenues for allocation. This can help Indian markets to continue shining among EM peers in 2024.

PSU stocks had a stupendous run in FY24. Is there more steam in this euphoria?

Rishabh Goel: On the strength of P/E rerating, the PSU category has experienced a notable comeback following an extended period of underperformance in the pre-Covid era.

We think future return expectations can be moderated in line with earnings growth as long as values remain above the long-term average, but we advise caution when it comes to stocks where valuations have soared significantly.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

William Murphy

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