Midcap and smallcap stocks have fallen significantly over the past couple of months, primarily because of their inflated valuations.
In an exclusive interview with Moneycontrol’s Kshitij Anand, Managing Director and Chief Executive Officer of ICICI Prudential AMC, Nimesh Shah, said the mutual fund house continues to find midcaps and smallcaps unattractive in comparison to largecap stocks. Edited excerpts...
Q: Amid macroeconomic and political concerns, how do you see the market panning out over the next 12 months?
A: We believe the equity markets are likely to be volatile owing to global and local events, over the next 12-18 months. From a valuation perspective, markets continue to remain expensive, with largecaps being reasonably valued while small and midcaps remain overvalued.
Going forward, earnings outlook is the key for sustaining such high valuations. In the meanwhile, watch out for higher global interest rates, crude oil price and events in the run-up to 2019 elections.
Q: A total of 21 public sector banks have collectively reported losses of Rs 25,775 crore because of bank frauds in FY18. Do you think it would be wise to catch this falling knife?
A: When it comes to investing into public sector banks, it is important to look at each of the names individually, analyze their fundamentals, rather than looking at a PSU basket. Such individual analysis shall help arrive at good investment opportunities.
Q: Most companies' March quarter results have been announced now. How do you rate India Inc's performance in the quarter?
A: The performance of India Inc in Q4 was in line with our expectations. While banking delivered some bad numbers, it was largely on expected lines. In general, there has been an improvement in the economy and corporate performance as such. We believe the earnings cycle will continue to improve.
Q: Midcap and smallcap stocks have taken a beating in the last 2-3 months. What should investors do with stocks that have witnessed double-digit falls and are impacting their portfolio?
A: Mid and small caps have corrected as valuations were high. We continue to find them unattractive compared to large-cap companies.
Q: Moving on from stocks, most of the funds based on smallcaps and midcaps are bleeding. What do you suggest your clients do – hold them and continue SIP, add more money on dips or book profits?
A: For those who are invested in the midcap and smallcap space, our advice for them is to continue with their investments through the SIP route for the long term (five years or more), at this point of time.
However, for fresh investment we are positive on large caps over mid and small caps and for lump sum investment, opt for balanced advantage category of funds.
Q: Where do you see crude oil prices going by end of December? Do you think high crude oil prices will make aviation, OMC, and tyre stocks slightly unfavorable?
A: It is difficult to predict oil prices, which currently is dependent on what Russia and Saudi Arabia decides over the next few months. If crude oil prices continue to escalate from current levels, then select sectors will turn unfavorable.
Q: Do you think we will have a normal monsoon this year? Which sectors are likely to benefit the most?
A: The MET department has forecast a normal monsoon, which is good for rural India. Rural consumption theme and agriculture sector are the pockets which are likely to benefit from this.
Q: Flows into mutual funds have slowed. Do you think the domestic inflow story coming to an end?
A: It is very early to comment on the domestic inflow story. However, from what we have observed over the last three years, investors have largely come into the market through the SIP route.
Thanks to the AMFI initiative Mutual Fund Sahi Hai, along with the various investor education programs launched by the AMCs in conjugation with the media, there is an improved understanding that markets may tend to be volatile in the short run but over long term, markets/mutual funds tend to deliver reasonable returns.
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