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Last Updated : Feb 20, 2018 12:31 PM IST | Source: Moneycontrol.com

Another 15% fall likely in small & midcaps; some microcaps may turn multibaggers

The Midcap earnings were far better but headline growth was skewed by a few names. It’s surprising that this market has held up relatively well at clearly stretched valuations.

Given where we stand on valuations and elevated expectations for FY19E, we wouldn’t say we have seen enough pain yet, Piyush Sharma, Co-founder & Portfolio Manager, Metis Capital Management Ltd, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

Q) D-Street got caught up with global contagion post Budget. Do you see more pain before we some stability on D-Street?

Given where we stand on valuations and elevated expectations for FY19E, we wouldn’t say we have seen enough pain yet. In contrast with the prevailing sentiment, Nifty’s F3Q earnings were poor (9-10 percent earnings growth, ex-financials), despite comping a demonetization-hit quarter from last year.

The Midcap earnings were far better but headline growth was skewed by a few names. It’s surprising that this market has held up relatively well at clearly stretched valuations.

Q) The impositions of LTCG was indeed a negative for investors but do you think that it can push investors away from equity markets? How much can the government garner from LTCG tax?

For all the brouhaha around SIPs, the fact is that vast majority of Indian retail investors take a fairly speculative approach to investing in listed securities. The idea behind eliminating LTCG was to inculcate the habit of long-term investing.

For most people that haven’t happened, and in that sense, the decision does appear a bit premature. By itself, the decision doesn’t really change anything for the majority of retail investors.

We also disagree with opinions that suggest that global allocations can materially shift because of the imposition of LTCG taxes. It’ll be speculative to comment on LTCG tax collections but it’s likely that FY19E collections will exceed $3 Bil {from FY17 since FPIs are more likely to re-allocate in the coming year}

Q) The case of valuations does come across after such a move on D-Street. Do you see room for further downside and if yes then is there a case for a correction of 5 percent-10 percent?

The Nifty can easily have a 5-10 percent drawdown. Small and midcaps (as a universe) can easily witness 15 percent-25 percent drawdown.

Q) Plenty of mid & smallcap stocks got beaten 30-40 percent in a matter of days. What should investors do who have seen such erosion in their portfolio? Sit tight or book profit on rallies?

As these stretched valuations potentially cool down further, the most hurt segment of investors would be the speculative retail class, as has been the case YTD.

This group was the biggest beneficiary of the largely indiscriminate rally last year and is likely to lose most of its accrued gains as prices readjust to underlying fundamentals.

For everyone else (i.e. investors that rely on professional money managers), our recommendation would be to take eyes off of the ticker tape and focus only on clean underlying earnings. If your manager can clearly explain his/her current strategy and isn’t dependent on a big macro-driven earnings revival to perform, you should certainly stay invested.

Q) Do you see FIIs adjust their trading strategy as Indian bourses move to stop feeding data to SGX? The agreement between the NSE and SGC is set to end in August. The open interest in SGX Nifty is 70-75 percent more than the total open interest of Nifty futures on the Nifty.

We don’t trade in SGX futures and nothing changes for us. Exchanges are focused on bringing the liquidity on their platforms and to that extent, SGX can set up an arrangement with NSE’s IFSC exchange.

We are not sure whether 6 months are enough to come up with an alternative. If SGX cannot come up with an alternative, you’ll obviously see some loss in futures volume.

Q) There are many investors who have suffered a big cut in their portfolio not just in direct equities but mutual funds thanks to global rout. What is your advice to them?

The poor price discovery in India, particularly within small and midcaps, acts both ways – It can help you capitalize on valuation disconnects or lead you onto something that can seriously hurt you.

Our general advice to investors is to not overly engage in this part of the market by themselves. The best way to capture this opportunity is to work with a good money manager. Don’t just go with what your financial advisor peddles. Ask questions!

You’ll almost never be able to pick inflection points and that shouldn’t be your objective. For those invested with traditional mutual funds and other managers: they should consistently evaluate their managers over 3-yr timeframes and should stay invested if they see competitive performance over such time frames, can identify clarity of thought, and there are no unnecessary strategy shifts. It’s futile to make entry/exit calls on short-term market gyrations.

Q) Top 5 stocks which you think could turn multibaggers in the next 2-3 years?

We don’t discuss specific names or our holdings. However, we would add that at current valuations, the likely hunting ground for multibaggers would be in the micro-cap space. Needless to say that that space is a minefield and such exposures should be limited for most retail investors.
First Published on Feb 20, 2018 12:31 pm
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