Daily Voice: Don't see major triggers for midcap & smallcap correction, says this investment strategist

Many midcap stocks were significantly overvalued earlier. With recent corrections, approximately 30 percent of these stocks are now trading at more reasonable valuations. The situation is similar for smallcaps.

However, the challenge lies in the size of the universe. The midcap category consists of only about 150 stocks, of which approximately 40 are now within a reasonable valuation range. For smallcaps, the universe is larger, with nearly 400 stocks.

Investors can use stringent elimination and selection criteria to identify opportunities within these categories and potentially build a well-diversified yet focused portfolio of 20-30 stocks.

As for further corrections, the possibility always exists from any level. However, we don’t currently see any fundamental economic or financial triggers that would lead to a significant correction. There’s an equal possibility of an upside, in our opinion.

Are you fully invested during the current market correction?

Yes, we are fully invested, as we don’t see any fundamental reasons to be pessimistic about the Indian economy in the long term. For us, corrections present opportunities to explore attractive stocks outside our portfolio. If any of these stocks pass our rigorous scientific investing framework and meet the high bar for expected returns and alpha potential compared to our existing portfolio, we may consider adding them.

Are US economic data points suggesting only one or two Fed rate cuts in the next year?

For the Fed to limit rate cuts to just one or two, inflation would need to remain extremely sticky, showing no signs of decline. Additionally, the economy would have to grow at a steady pace without rate cuts, with job growth continuing unaffected. We think this scenario is unlikely.

Donald Trump’s intent to significantly cut government spending could shift the burden of economic growth to private sector investments and consumer spending. Lower interest rates will be crucial to encourage private investments. While tariffs and policy incentives for domestic manufacturing could provide some support, rate cuts are essential for sustained growth.

Consumer spending, too, benefits from lower rates. In our view, 3-4 Fed rate cuts are possible in 2025. The main risk to this outlook would be a resurgence in inflation, potentially caused by supply shortages due to tariffs or other factors, though this seems unlikely at the moment.

Will the rupee remain weak against the U.S. dollar while outperforming other emerging market currencies?

With the Fed expected to cut rates and the RBI likely to move more cautiously, the rupee is likely to remain stable or even appreciate slightly against the dollar. Moreover, Donald Trump’s preference for a weaker dollar to boost US exports and local manufacturing could also support a stronger rupee.

We also expect the INR to outperform other emerging market currencies given this context, favouring a bias towards a stronger INR.

Do you foresee a pickup in corporate earnings over the next few quarters?

FY25 is expected to be a mixed bag. While sectors like real estate and textiles may continue to face challenges, banks are likely to show significant earnings growth. IT sector earnings are projected to recover starting FY26, though this timeline could be accelerated depending on policies introduced by the new US administration.

Are you concerned about developments involving the Adani Group in the US?

Not particularly. Our exposure to the Adani Group is limited, so the impact is more sentiment-driven rather than indicative of any fundamental changes in the broader economy or sectors. The negative sentiment has already been factored into stock prices, prompting investors to reassess whether group companies are now trading below their intrinsic values.

That said, future developments and how they unfold will determine the overall impact.

Will the energy transition theme persist for the next two decades? Are you highly optimistic about it?

The energy transition is an irreversible trend. While policy and incentive support for green technologies may fluctuate across countries due to leadership changes, the global shift away from fossil fuels is unlikely to reverse.

The momentum driving the adoption of new technologies is strong, and we remain bullish on this theme. However, we are cautious about valuations. While we may be optimistic about a sector's growth potential, we avoid overvalued leaders in the space. Instead, we look across the value chain and ecosystem for under-the-radar opportunities offering better value.

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