Froth will be unwound this year; difficult to think there won't be accidents along the way: Ruchit Mehta, SBI Mutual Fund

Ruchit Mehta: Last year was pretty good for equities. In some senses, it was a year in which markets pivoted into a big rally, largely driven by positive earnings. This year, we are tracking north of 20 percent-plus earnings growth. At the start of the year, the expectation was for mid-teens to late teens.

At an aggregate level, there has been a wider dispersion of returns. The smaller the market cap, the higher the uptick. Going forward, we think that the coming year seems to be a lot more sanguine — a year of modest returns. We think largecaps will do better than midcaps, and midcaps will do better than smallcaps.

Do you believe the markets are frothy?

Mehta: Last year there was a lot of froth and price momentum in smallcaps. That is already starting to unwind. If you look at the Nifty 250 Small Cap Index, the larger names, or the names in the index that did not do well last year, are starting to do relatively better. Among the high-momentum names, you are starting to see a 10 to even 40 percent correction. This will continue. Hopefully, a lot of froth will get sucked out this year. We hope though that there are no major accidents along the way. But given the changing nature of investor participation, which is relatively higher in direct stocks, it's quite difficult to think that there won't be any accidents. So, avoiding accidents is going to be a big aspect of this year.

Also read: Big daddy of small-cap funds says segment frothy, investors need to have 5-7 year horizon

What are you bullish on right now?

Pradeep Kumar Kesavan: From a medium- to long-term view, we haven’t changed our view on which sectors will do well. In most of our portfolios, the exposure we took in terms of cyclically exposed sectors, be it industrials, capital goods companies, even to that extent, banks, etc., wherever we have taken that with a longer-term view, those views remain. Having said that, any changes in the medium or near term will be valuation-based. Some of these sectors, which we are very positive about, have also become very expensive. So, incrementally, we may not add to these positions at these levels.

Wherever there is valuation comfort and we are positive — for example, financial services. We are also looking at hospitals. Incrementally, we will want to add defensiveness to some of the portfolios. Besides, there are attractive opportunities in the consumer discretionary space. Discretionary consumption at the lower end, which has suffered for quite a bit, has quite a bit of opportunity from a valuation standpoint.

Mehta: Consumer discretionary is an area we think has the potential to be a multi-year opportunity, in spite of the high valuations. As we see an upgrade in incomes, you'll likely see an upgrade in lifestyles. This should result in a lot of lifestyle-related products seeing a huge uptick in demand — whether it's automotive or travel and tourism. If the real estate cycle continues to be strong, then you'll continue to see a lot of uptick in demand for white goods and electrical products as well.

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