Let us understand what is the way forward for small and midcap stocks and I will break it into two or three points here, first, for the mid and the smallcap stocks as a cycle; second, where are they headed in terms of a theme and when will the momentum really come back in some of these stocks?
Aman Chowhan: First thing is, see, there is always this assumption that it is largecap versus midcaps. Normally, it does not happen that way. At any given point of time, there will be some largecap that will do well, some midcap that will do well, irrespective of the cycle. Now, currently, we had good three, three-and-a-half years of mid and smallcap outperformance and we are giving away some of that outperformance, that too only those stocks which have gone to 50-60 PE have corrected the maximum.
So, it is not that overall as a basket, mid and smallcap have corrected. Yes, there is some technical factor, liquidity factor, retail investment or interest was maximum in this space which is obvious, and hence that is where the maximum selling is.
Because as far as institutions are concerned, us or whomever I have spoken to, there has been no redemption in the MF or in the PMS, AIF space. So, it is predominantly retail that has been selling and that is where the maximum interest was and that is the reason we have seen a sharp correction in the mid and smallcaps. Going ahead, the whole market is waiting now for these numbers to pick up.
There has been some pickup, whether in GDP numbers, in earnings growth, or in top line or something for it to get some trigger or some reason to be bullish about or to add on to what the current holding is, so that is what the whole situation is.
Mid and smallcap will start to do well once you see the numbers coming in. There are some sectors coming in where numbers are still strong, maybe the PE went up too high, which has now corrected, and it will stabilise at current levels.
And overall, once the market starts to see some momentum, these stocks will also perform in that. So, it is not a largecap versus the midcaps. Within midcaps and within largecaps, wherever we see earnings visibility, those stocks will outperform for sure.
Where are these midcap dominated schemes headed and for those who have a exposure, direct exposure or indirect exposure via PMS or via mutual funds in small and midcap stocks, what should they do now, just bear the pain, move to largecap or perhaps add more to the current commitment?
Aman Chowhan: I think bear the pain, add to it over the next six months, nothing in a hurry and then maybe the six months is the consolidation phase or time correction or whatever word we use for it, it is time to put capital to use and you will reap the benefits of that capital maybe post five-six months once dust settles globally, what Trump wants to do, and what retaliation other governments or countries will do and India also whatever measure the government has taken, both for the consumption as well as the capex starts getting reflected and we see a pickup in the GDP numbers, earnings growth numbers is when the markets will again start to give you a healthy return.
So, very realistically, what should be the index return expectation for this year, both on the Nifty as well as the mid and smallcaps?
Aman Chowhan: Can be flattish to maybe 5-10% up and down, not more than that, either ways. That is the other thing, one is wondering how soon before the pain gets resurrected and more importantly, whether or not you will have to live with this kind of gut-wrenching volatility on a daily basis for the next foreseeable future.
Aman Chowhan: I think volatility is going to stay because there is uncertainty both locally as well as globally. Earlier there was volatility globally, but locally we were doing strong, now that is not the case. So, when there is uncertainty, this is something that the markets do not like at all and hence, right now even the momentum or confidence or sentiment everything is weak, so the volatility is going to stay.
It can get worse before it gets better, that is what the scenario is because we all know market is extreme on both sides when it is rising and when it is falling, so we are somewhere midway right now.
It is not that we have seen the bottom and the worst is over kind of thing. At the same time, we have seen a decent correction. It is not that we are going to fall another 30-40% from here on, maybe 5-10% from current levels is possible in the near term before we start to recover.
10% on the Nifty?
Aman Chowhan: Overall, yes. Nifty could be less because see within Nifty banking is the highest overweight where this whole segment is looking good, that segment has not performed in the last two years, there is not much of a downside there.
IT will continue to do well because of the currency. Pharma, we have seen in spite of whatever the tariff news today, stocks are just down 2-3%, maybe in a week or 10 days’ time they will recover that also.
So, the heavyweight consumers because of the budget and the measure the government has taken, there is not much of a downside. The Nifty might not, but the broad index or broad stocks can further correct 5-10%.
That may be a very tactical approach, but if one has to look at the recent correction that has played out and sort of rework your core portfolio or assume someone is making their portfolio afresh, what kind of an allocation would you recommend to them, both market cap-wise and of course any stocks or sector selection?
Aman Chowhan: It is more to do with the person as to what kind of risk appetite he has, what kind of time horizon he has. But broadly, it will be very popular to say that stick to largecaps, it is volatile times and hence this is the best way to go in. Yes, it is.
But if somebody has a three to four-year view, then at least 50-50 should be the allocation between midcaps and largecaps because ultimately, Indian equity market is all about midcaps.
This is where the maximum opportunity is. We all know the largecap, we all know these companies are good companies, but it will give you a normal return.
If you need to generate an alpha, you need to look at mid market. You need not go to a small or a micro-cap, but at least midcap should be in the portfolio because that is where the entrepreneurial spirit and the growth potential of India lies.
