Exercise caution in midcap space due to high leverage: ICICI Prudential AMC's CEO

Nimesh Shah's view on midcap space

Nimesh Shah, the managing director and CEO of ICICI Prudential Mutual Fund, in an exclusive conversation with Moneycontrol shared crucial insights regarding the Indian market's dynamics and the pitfalls that investors, especially those in the midcap space, might encounter.

Saying prudence and the need for a cautious approach are paramount, Shah highlighted significant areas of concern and offered valuable advice for traders, particularly those engaged in futures and options (F&O) trading.

Shah's primary concern revolved around the midcap segment, where he observed an alarming trend of substantial leverage among domestic investors. He expressed worry about this leverage potentially leading to disappointments, especially in the absence of corresponding earnings growth in the segment. Shah pointed out that while markets have historically followed earnings, the current scenario with high leverage in speculative stocks might not sustain itself if earnings fail to match expectations.

His cautious outlook on the midcap space stemmed from the observation that speculative trading had inflated certain stocks, leading to a potential bubble. This speculation, driven by leverage and gamification of the stock market, could result in significant corrections in specific pockets of the midcap and small-cap segments. Shah underlined the need for investors to exercise caution, particularly in stocks where large open market positions signal high speculation, possibly leading to disappointing outcomes.

Regarding F&O trading, Shah expressed concern about the high percentage of traders incurring losses, often enticed by irresponsible calls guaranteeing quick returns. He delved into the psychological aspect of losses, noting that traders tend to switch to safer investments after substantial setbacks. His advice to young investors was clear: prioritise research and understand a company's future earnings potential before investing in stocks.

Shah’s overarching message centred on the importance of diligence and research in investment decisions. He cautioned against speculative trading practices and advocated for a prudent, well-informed approach, especially in the mid cap space.