Meet the fund manager: Smallcaps will outperform largecaps; invest now for 3-5 years

In the current environment investing in selective big names is because investors are “running for safety” and not for returns, something that should change once the overall sentiment improves, Amit Doshi, Investment Director at Care PMS, said in an interview to Moneycontrol’s Kshitij Anand.

 Edited excerpts:

Q) A double-digit return in September! For many of the investors who gave up on the broader markers, your fund’s performance shows that investing in quality always yield results. What was your trading strategy?
A) Well, there was no “trading strategy”; “staying invested” was the strategy we followed. If you look at the history of equities, good businesses always navigate the equity market correction phase and emerge a winner.

We outperformed because we had good weight on few companies that did exceedingly well on the price front in a single month, backed by continuous good businesses performance in previous quarters.

Q) Can we say that the broader market is out of the woods? Investors have burnt their fingers in the last one-two years. What should be investors’ strategy?

A) It is difficult to say that the broader market is out of the woods because I still see there is a lack of confidence except for 12-15 largecap stocks. On the economic front, the macro figures are also not very positive, coupled with global issues, keep a negative hangover in the market.

Also, to a great extent, investors fear, or lack confidence, as there is a dearth of good stocks or they are very few companies in small and mid-cap stocks that are worth investing in.

So, there is a possibility of burning fingers, if the investment is done without the required study in this space. I feel that this is the best time to accumulate good small and mid-cap stocks for investors with a horizon of three to five years.

Q) Taking a long term horizon, do you feel that small and mid-cap stocks are likely to outperform largecaps in the next two-three years as the economy picks pace?

A) No doubt about it. In fact, they will outperform with big margins. Once market stabilises, which will help regain investors’ confidence, the part of the money is sure to shift from very high PE largecaps to attractively priced small and mid-caps.

I believe that this is sure to happen over a period of time, even if the economy does not pick up as expected. The current reason for remaining invested or investing in selective big names, is the mood of investors is “running for safety” and not for returns, which should change once the overall sentiment would improve.

Q) What are your expectations from the September quarter earnings? Which sectors are likely to outperform and which are likely to underperform?

A) The September quarter earnings are expected to be subdued for most of the sectors, as evident from the various industrial data published so far.

Automobile including its ancillaries, banking and finance, cement, metal, infra and capital goods, consumer durables except AC, real estate, textiles, etc are expected to underperform.

Pharma, agri inputs, FMCG, including food and beverages, IT, paper & packaging, etc. are some of the sectors expected to comparatively do better.

Q) What is your outlook for FY20?

A) I feel that the worst is over. Domestic macros like a good monsoon, lower interest rates and stable crude oil prices have turned favourable.

In addition, the corporate tax rate cut, especially tax rate of 15 percent for new manufacturing companies, should bring a lot of interest and many steps from the government for releasing liquidity in the system should see the cycle back into rolls in the second half of this year.

We have also seen an increase in confidence among retail investors in the form of consistent inflow through mutual fund SIPs. Further, we will see more funds coming back to equities on account of a lack of investment avenues in the field of real estate and fixed-income instruments.

Also, we are seeing falling interest rates where many stocks are available at attractive yields. For example, a company generating net profits of 12-15% and giving a dividend yield of 3-5% at a current market price along with good balance sheet is likely to attract investors’ interest and this market offers such opportunities.

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