S Naren sees correction in midcaps and smallcaps, says NBFC valuations still not 'dirt cheap'

"Midcaps and smallcaps are cheaper as both are negative through the current year but both indices rallied more than 45 percent last year and compared to that upside, these stocks are also not looking dirt cheap now, barring a few stocks," he said.

He expects some correction in midcaps and smallcaps, going ahead.

NBFCs

Recently, IL&FS defaulted on several interest payments to bondholders, which raised liquidity fears in non-banking finance companies and also forced some mutual fund houses to redeem AAA-rated bonds of DHFL at a steep discount to adjust loss of investment in IL&FS bonds.

Many non-banking finance companies' share prices shot up 300-400 percent last year or couple of years but now these stocks corrected only 30-40 percent on recent liquidity fears.

"It suggests that valuations are not dirt cheap. Our fund like Balanced Advantage fund, which is based on equity, is not showing market is at dirt cheap levels," S Naren said.

Macros

He believes macros are strong right now as the government has taken good decision to pass on rising oil prices and rupee depreciation.

Current step by government and RBI to do open market operations (OMO) is another good decision to solve liquidity problem, he said. "So far the rupee has been well managed but we are going to see rupee depreciation due to rising oil prices and tightening by US Federal Reserve."

He feels one of the good things is happening in credit market is redemption. "In fact, companies are well aware that there is redemption in September and credit policy is due in October."

So combination of two, asset management companies were carefully positioned themselves, he said, adding so far things have been ok on debt market front.

He continues to see inflow in mutual funds. "Some of inflows came in when the market was at peak, which lost some shine in September. We are betting export oriented themes like manufacturing, pharma etc, which will be helpful for us."

Consumption

S Naren said consumption is the best structural story for next 5-10 years but sector is not cheap right now after multi-year bull run. "It is a long term vehicle and one has to be seen nibbling valuations."

Equity Flows

He feels inflow is not a concern now as there is a big support on equity side. But for debt side, next week and this week is a bit of concern, he said.

Overall oil has gone up substantially higher which is always a challenge for India.