Mid-cap, micro-cap and small-caps look expensive; stick with large-caps now: Nilesh Shah

Indian Overseas Bank, RHI Magnesita, and Hindustan Copper outperform broader markets.

Indian markets are trading near all-time high levels. However, they are trading only a little above their fair valuation. The Triveni Sangam of fund flow, positive sentiments and strong fundamentals are driving the rally.

Money is flowing from domestic as well as global investors. They are aggressively buying in the secondary market even though sellers are reluctant to sell. Primary markets were not seeing large deals, but there has been some pick-up in recent times with more than three dozen Initial Public Offerings (IPO) lined up. In the secondary market, selling was done primarily by promoters and private equity /venture capital funds. Aggressive fund flows pushed the valuation above their fair value.

Moneycontrol is bringing to you a special series to capture India's rising economic might, as it emerges stronger from the pandemic amid a sluggish world economy. Find out more.

This rally is driven by sentiments that have turned distinctly positive for India. India is an oasis in the global desert. India is the fastest-growing major economy in the world. It has inflation within the Reserve Bank of India’s (RBI) target range despite a sharp hike in tomato prices in recent times. It is one of the few major economies that has positive real interest rates. Foreign exchange (FX) reserves are the fourth highest globally and more than Net FX debt. India’s trade deficit and fiscal deficit are under control. Government-led investment has been picking up. The Rupee is remarkably stable and is one of the least volatile currencies in the world. India, which moved from 10th largest economy in 2014 to 5th largest economy in 2022, is destined to move to 3rd largest economy in the next few years.

Reasons why India is a growing economy

What is happening in India is somewhat like the Akbar Birbal story. Akbar asked Birbal to make a line bigger without touching it. Birbal drew a smaller line below it to make the line above bigger. India’s growth story and its macro data are good but look even better than peers which are busy scoring self-goals.

Also read | HDFC Bank eyes need-based product sales for new customers, post merger with HDFC

Flows and sentiments are fickle and can turn around quickly unless backed by the fundamentals. Fortunately for India, fundamentals are not far behind. The Indian economy is on firm footing to be the third largest economy in the world over the next few years. This growth is led by entrepreneurs of India guided by the government and the regulators. This growth results in earnings growth for India Inc as they create global-scale businesses. Our corporate governance standards are superior to peer groups. Our growth is driven by green transformation. We are the lowest per capita emitter of carbon in the world. We are on the way to achieve our targets on COP 26. The 3 G Trinity of growth, governance, and green, excites investors about Indian markets.

The red signals

There are many red signals in the market. Many micro caps, mini caps, and small cap stocks look expensive and way ahead of their fundamentals. Many of them are trading way above large cap stock valuations. That party is unlikely to last longer. A few companies have started adding AI (artificial intelligence) suffixes to their name. It is important for investors to stay within the Laxman-Rekha.

What should investors do?

This is the time to be a long-term investor. Keep a neutral location based on your risk appetite and investment goal in equity as an asset class. Be marginally biased in favour of a large-cap portfolio. Keep some dry powder (cash reserves or easily marketable stock) to buy during a correction, as markets are trading above historical averages. Stay with quality companies. This is not a good time to be a momentum trader. This is not the time to run a leveraged trading position unless you are skilled at managing stop losses. There is a high reward probability as long as we deliver the 3 G trinity of growth governance and green transformation.

Also read | Personal Finance: What’s the right asset allocation to play an elevated interest rate situation?

A systematic investment plan is the best way to participate in India's growth story for ordinary investors. If an investor believes they don’t have time/discipline to manage asset allocation, they can outsource the same to professionals through asset allocation funds. Normally such funds allocate across debt, equity, and gold to build portfolios.

Sit back, relax, and enjoy the rollercoaster ride, which is likely to happen in Indian equity markets over the next few years. If you have worn an appropriate safety belt and are not going to jump in between the ride, you will be happy that you took the ride at the end of the journey.

Also read | RBI’s worry on inflation can impact debt funds. Here is what investors should do

I recommend the investors remember three iconic taglines:

De Beers India's Growth story is forever
Mountain Dew Dar Ke Aage Jeet HaiPatek Phillipe You don't own Indian Equities. You merely pass it on to the next generation