Small-cap stocks expensive compared to historical valuations: Kotak's Nilesh Shah warns investors

Shah said people are following a herd mentality and buying microcap companies based on momentum and not on fundamentals

The valuation of small-cap companies is expensive compared to their historical valuation said Nilesh Shah, MD of Kotak AMC in an interview with CNBC-TV18 on the performance of small-cap companies.

“When moneymaking is so easy, you know there is risk ahead,” he added.

Shah said people are following a herd mentality and buying microcap companies based on momentum and not on fundamentals. “Small cap companies as a percentage of total market capitalisation is higher than 2007-11. We all know what happened after 2007” added Shah.

He advised smallcap investors to have a safety margin while investing. Without it, the investors might be forced to hold on to small-cap stocks for a longer period of time to make money, he said. “It is better to lose some upside than to create a bigger downside” added Shah.

Auto industry in a transitioning market

Shah said the auto industry is undergoing a transitional phase as they try to adapt to the electric and hybrid vehicles. He said the market is wondering whether the internal combustion engine (ICE) makers be able to move to hybrid, electric or even hydrogen fuel cells if that technology is the future.

He added that startups have an advantage in this scenario. “Clearly the new age companies, the startups have a bigger advantage because they are starting on a clean slate. The traditional companies that are making money from their ICE business have to jump to catch the electric business,” said Shah.

He added that the two-wheeler segment was affected by the uneven recovery in the market. He opined the deficient monsoon which affected rural income.

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