Should you Book profit or Continue buying Post 4th June 2024

Well, the asset allocation principles often get ignored and readjusted when greed strikes the market particularly when Mr Modi comes back for the 3rd term.  Many investors and market players informed me that the market has discounted the 3rd term of Modi. Well easier said than done and that is what the market is reflecting. Next 3 months we will witness a huge number of Demat accounts being opened and a record number of investors joining the market influenced by Youtubers and social media advertisements.  The majority of this type of investors have a short-term myopic vision of wealth creation and investments chasing 1 two ka 4 types of bets.  At the same time, we will find many inexperienced and short-experienced people becoming financial advisors and guiding investors. These people don’t have the proper educational qualifications or experience to manage investor inflows. They will come to sell products in this bull market rally since  “Allah Meherban to Gadha Pehlwan”

 These investors are the one who are the real disruptors of the Indian market guided by social media influencers.  Improper advice, limited research, and inexperienced advice will drive the price of socks.

 We will witness a bizarre price rise on Midcap and Small-cap stocks.  All brokers and all financial advisors will advise on increasing equity allocations, keeping the current momentum. Valuations will get tossed when the macros are so strong. Hence one will witness wide fluctuations between prices and rationales. You will find many stocks giving astronomical returns where you never heard the company name. One should be prepared for the same.

 This market phase raises the risk of the market and reduces the ability of judgments. Yes, the most phenomenal behavioural aspect of the market and investor follow.   Short-term bets get 90% of the allocation of the market and we often follow the herd mindset.

 What we are forgetting is that this phase is short frame and Indian markets lack valuation rationales at the stock level currently. The macros are not depicting the growth but more on the news side the market is driven.  Further global politics and issues have some impact on the Indian market which cannot be nullified.

 Do you know the biggest risk of the market euphoria is that retirement funds of the senior citizens at the individual level will flow into the Equity market? This we have seen in 2020-21 and we will witness the same. This is also the place where miss selling of various other equity products like AIF, and PMS gets into place. Senior citizens of the age of 75 or 80 are being guided by wealth firms and advisors to invest in these products for huge short-term returns.  Well, greed and myopic investment and wealth creation vision create opportunities for these types of wealth outfits and Relationship managers /advisors.

 Many investors in these market scenarios will pull out funds from provident funds and other retirement products and will invest in equities – direct or indirect.

 The current macros are strong, and the 100-day reform measures and future-driven measures of economic reforms will drive the market to new highs. The inflow in the market will grow from here from sources like Mutual Funds, SIPs, PMS, direct equities, and small-case products but the major inflow will be from mutual funds only.

 The wrong products which will be pitched keeping equities in the loop and disguised are Guaranteed insurance products, PMS, AIF, and SIPS will be stopped and lumpsum equity allocation will be increased, age will not be considered neither client risk appetite will be factored when the products will be sold.

 We need to ignore and follow the basic thumb rule of risk management and the ability to take risks in these markets in case there is a sudden blow-up.  This aspect needs to be kept in mind irrespective of whether you are a new investor or an old investor.    One should check the qualifications of the advisor whom you have made God.  Since in every bull market, even the cobbler becomes an advisor.

 Conclusion and Final Verdict

 Your investments and wealth creation should be either as per the risk profile, as per your goal or as per the defined objective.  Further short-term greed should be short-term and not to be made a longer-term asset burden. Profit booking should be guided based on risk-taking ability and the best advice is that profit booking should be a regular activity since the other name for the same is Rebalancing. Post 4th June and the current euphoria should be taken very seriously despite being recognized as HNI, UHNI and retail. Since money has no category, it's only hard-earned. Markets over the next 5 years will grow at a CAGR of 12% to 15% based on today’s rationale. But it might change at any moment hence invest but not under biases and greed of euphoria

 NRI clients should invest in keeping a long-term view of the Indian markets and not any of the above rationales.  They should look for opportunities across the globe and their advisor should be a Global one having knowledge of his own on the global context and not specific to India.

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Expect 1 interest rate cut or May not be that too in 2024

 

The US election and the one who will be winning the same will face one of the hardship of interest rates management. The current scenario of U.S economy does not hint any interest rate cut down. Yes please don’t expect any rate cut and even if you then restrict it to 1 cut only in CY 2024.More than two years after the Federal Reserve started raising interest rates to alleviate a pandemic-era price spike, the core consumer price index remains well above the central bank’s target. It’s a bit puzzling, then, that former  President Donald Trump’s economic agenda seems to be dedicated to raising prices. Even Goldman Sachs analysts said they now do not expect the Fed to roll out a rate cut until September.

But here we get you some of the key data points to reflect and accentuate the pain points building within U.S Economy and the divergence of macro data’s. Since August 2021, the US economy has witnessed the depletion of $2.1 trillion in excess savings. Following the influx of $4 trillion in stimulus funds from March 2020 to August 2021, households accumulated $2.1 trillion in excess savings. 

However, since then, these savings have been rapidly depleted at a rate of approximately $70 billion per month, reaching a deficit of -$72 billion by March 2024. Simultaneously, US credit card debt has surged by $330 billion, reaching a record high of $1.1 trillion. Meanwhile, the savings rate in the US has declined from 3.5% in February to 3.2% in March, marking the lowest level since November 2022.

 A recent survey conducted by LendingTree revealed that 78% of US consumers now perceive fast food as a luxury item due to its escalating prices. Despite this perception, 75% of Americans still indulge in fast food at least once a week, although 62% state that the rising costs deter them from doing so more frequently. Notably, half of the respondents regard fast food as a luxury, particularly those facing financial hardships, notably households earning less than $30,000 annually. The cost of a typical family fast food meal has surged to $60-$70, prompting questions about the reasons behind the price hikes.

Meanwhile, concerns are mounting over the state of credit card debt, with serious delinquencies (90+ days) reaching 7%, the highest level since 2011. US credit card debt currently stands at a staggering $1.1 trillion, with $78 billion teetering on the brink of default.

Recent projections from the Congressional Budget Office (CBO) underscore the precarious fiscal trajectory of the United States. According to one scenario, the US Debt-to-GDP ratio is forecasted to surpass 250% by 2054 if government spending and revenues follow their 30-year historical averages. Alternatively, even a slight increase in the average interest rate on the national debt or a minor slowdown in productivity growth could result in a Debt-to-GDP ratio exceeding 200% by mid-century. These projections, however, assume no economic recessions during the forecast period.

 The surge in fast food prices has outpaced wage growth, with a 41% increase since 2017 compared to a 36% rise in average hourly earnings for non-managerial positions. Over the past decade, prices at fast food giant McDonald's have doubled, exacerbating concerns about affordability, especially in the wake of the pandemic.

 Federal Reserve data underscores the financial vulnerability of many Americans, with over half unable to cover a $2,000 emergency expense using savings, and a significant portion struggling to meet even smaller unexpected bills. Consumer weakness is further highlighted by the fact that almost one-fifth of respondents could only afford expenses below $100, while nearly a quarter reported difficulty paying all their bills in full.

 

Despite these challenges, global asset managers remain optimistic about the near-term economic outlook, with the majority discounting the likelihood of a recession within the next 12 months. However, mounting inflationary pressures and lingering economic uncertainties suggest that risks are on the rise.

 The US national debt continues to soar, reaching a new high of $34.6 trillion in April, a $1.6 trillion increase since September 2023. With total debt ballooning by 47% or $11 trillion in just four years, concerns about its sustainability persist, particularly given the potential for interest expenses to reach $1.6 trillion annually if the Federal Reserve maintains current interest rates.    

 Additionally, annual spending on home improvements and repairs is expected to decline for the first time since 2009, reflecting the impact of rising costs and elevated interest rates on household budgets. Despite this, the median US home sale price reached a new record in April, further highlighting the challenges faced by consumers in managing housing-related expenses. 

According to the Federal Reserve, 1 in 6 Americans residing in the poorest 10% of ZIP codes are currently experiencing credit card debt delinquency. This figure has surged from 11% in the second quarter of 2021 to 17% in the first quarter of 2024, marking the highest level in 21 years. In a span of just one decade, this percentage has more than doubled. Concurrently, the proportion of individuals nationwide with delinquent credit card debt stands at approximately 12%, the highest since 2003. For the majority of Americans, delinquency rates on credit card debt now exceed those observed during the 2008 Financial Crisis.

A Harris poll conducted for the Guardian reveals that 56% of Americans currently  perceive the country to be in a recession. Presently, 55% of Americans believe the economy is contracting, and 49% think that the S&P 500 has declined for the year. However, GDP data consistently indicates positive growth for seven consecutive quarters, and the S&P 500 has surged by 12% this year to reach a new all-time high. Despite these positive indicators, the poll suggests that 49% of Americans believe unemployment is at its highest level in 50 years, even though the unemployment rate has remained below 4%, nearing a 50-year low. 

According to the poll, 58% of Americans attribute the state of the economy to the president. This raises questions about the significant disparity between perception and factual data.

Conclusion:

Indian markets will be dependent on inhouse news and growth strategies and one will witness huge divergence in Global market news impact on the Indian markets. The market is fast enough to absorb and discount outlooks. Hence hold cash, invest for long-term matching India's economic growth.  More war will bring more investments at home since India will develop more policies to reduce import and hence the market will play accordingly. 

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PMS, AIF, MUTUAL FUNDS- to be Rs.200 lakhs Cr Industry before 2030

The financial year 2024 has been a boon for equity investors in India, with remarkable gains propelling wealth creation to unprecedented levels. A staggering Rs 129 lakh crore was added to investors' portfolios, with certain stocks witnessing astonishing rallies of up to 2,700%. This surge in wealth accumulation mirrors the robust performance of the market, as evidenced by the substantial increase in market capitalization of BSE-listed firms, which soared to Rs 386.97 lakh crore by March 28, 2024, from Rs 258.19 lakh crore in the preceding year.

Mutual funds have played a pivotal role in this wealth creation journey, with actively managed funds constituting a significant portion of the total assets under management (AUM). Of the INR 55 lakh crore total AUM recorded in March 2024, approximately INR 45 lakh crore, or 82%, was actively managed. Within the realm of pure equity AUM, amounting to INR 28 lakh crore, passive equity funds accounted for INR 4.6 lakh crore.

The surge in AUM, marking a remarkable 37% year-on-year increase and a striking 123% surge from post-pandemic lows, reflects growing investor confidence. Notably, net SIP inflows hit a record high of INR 19,271 crore in March, with average monthly SIP inflows for FY24 amounting to INR 16,602 crore, representing a notable 28% rise from the previous fiscal year.

In tandem with this financial fervour, India's Portfolio Management Services (PMS) industry has witnessed remarkable growth, managing a colossal ₹32 lakh crore of assets. With India's promising economic outlook and increasing awareness among professionals and entrepreneurs regarding wealth management tools, PMS is emerging as a preferred avenue for investment. This trend is particularly pronounced in Tier II and III towns, where the financialization of savings and the inclination towards personalized financial solutions are accelerating.

The potential for transformation within the PMS industry is evident in its remarkable performance, with 79% of PMS schemes surpassing their benchmarks over a decade. Despite the minimum investment threshold doubling from ₹25 lakh to ₹50 lakh, the client base has expanded significantly, growing from approximately 106,000 to about 147,000 over the past five years. on capex are tailwinds for growth.

Data compiled from SEBI and the Association of Portfolio Managers in India (APMI) shows that SBI Funds Management, UTI Asset Management and Darashaw & Company are the top three PMS in India.

 With assets of Rs.13 lakh crore, SBI Funds Management is top of the ranking table. UTI Asset Management secured a second position with AUM of Rs.12 lakh crore. Darashaw & Company is a distant third with an AUM of Rs.1 lakh crore in Jan 2024. Of the total PMS AUM of Rs.32 lakh crore, these three players command 91% or Rs.26 lakh crore. Further, the AUM of the PMS industry excluding EPFO/PF investments stood at Rs.9 lakh crore on Jan 31, 2024.

 Furthermore, investor preferences are shifting towards unlisted equity, alternative investments, and international assets, aligning with global trends. This trend is mirrored in the substantial growth of assets under management (AUM) within the sector, which has more than doubled in the last five years, reaching ₹32.22 lakh crore by January 2024. The rise of Mumbai as the leading city in terms of billionaire residents further emphasizes India's increasing financial prominence.

Amidst this financial dynamism, private credit has emerged as a key investment avenue, with commitments raised by Category II funds reaching ₹8.8 lakh crore over the past seven years. With the alternatives industry expected to triple in size over the next five years, private credit is poised to play a significant role in shaping the investment landscape.

Conclusion

Maintaining composure and avoiding impulsive selling is crucial in navigating market volatility. It's essential to acknowledge that fluctuations are inherent in equity markets, with history demonstrating that downturns are often followed by periods of recovery and growth. Succumbing to panic selling during market declines and increased volatility can substantially diminish long-term returns for investors.

RBI dividend, followed by GST collections, higher income tax collections will lead to greater) public capex spending, (2) structural reforms and (3) incentives to boost manufacturing and infrastructure are likely to support India’s medium-term growth outlook and markets.

Historically, drawdowns in the Nifty index have seldom exceeded 10-15% except during global shocks and recessions. We anticipate that any further declines in the Nifty index will likely be limited, supported by resilient domestic macro fundamentals and our outlook for a gradual moderation in the U.S. economy. Resilient domestic demand, supportive government policies and continued focus on capex are tailwinds for growth.

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The Global Trade -Who Dominates?

The European Union stands as a significant force in geoeconomics, alongside the United States and China. Despite this, it has historically lacked geopolitical sway and now faces a projected structural decline over the next 15 to 20 years. Here, we outline the primary contributors to this decline and propose potential strategies to tackle them:

Demographics present a hurdle, with an ageing population and a considerable portion of GDP directed towards social welfare. Energy scarcity poses a critical challenge, with the continent struggling due to insufficient energy production and the unavailability of affordable energy for citizens and vital industries. The current conflict landscape echoes post-World War II conditions, notably with Russia's aggressive actions towards Ukraine, which disrupt Europe's security architecture.

Escalating tensions in a new Cold War between the United States and China, dubbed "DragonBear," brings forth various challenges for Europe, such as the weaponization of resources, migration concerns, supply chain disruptions, energy transitions, and digitalization. The expected shift of the United States towards the Indo-Pacific region will require Europe to increase spending on security and defence, particularly in support of Ukraine.

Europe must engage in collaboration with leading powers like the U.S. and China in fields such as digitalization, quantum computing, artificial intelligence, and telecommunications to effectively manage the technological transition and maintain competitiveness. Attempts to mitigate risks by aligning more closely with China, similar to past strategies towards Russia, are likely to falter due to China's emergence as a dominant strategic rival shaping the future global order.

Russia's alignment with China in the context of the global power divide underscores the necessity for Europe to reassess its strategic alliances and adjust its position accordingly. Europe cannot maintain neutrality between the U.S. and China in the long term. Instead, it should concentrate on bolstering its European pillar within NATO, expanding free trade agreements, improving infrastructure connectivity, and prioritizing investment in innovation and entrepreneurship.

Streamlining military capabilities among EU members, establishing a professional army, and redefining roles and responsibilities can optimize resources and enhance efficiency. Shortly, Europe will require investments in the war economy and infrastructure, particularly in areas prone to potential conflicts like the Scandinavian and Central and Eastern European regions.

Neglecting these challenges risks pushing Europe towards political extremisms, undermining the European security order, and rendering the continent vulnerable to becoming a geopolitical tool in the 21st century.

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Geo -Political War Don't sit on Cash -Bulls & Bears

Despite numerous looming risks in the near term, Indian equities remain resilient, defying expectations of a correction. Investors grapple with the dilemma of where to allocate funds amidst a barrage of negative news. This analysis delves into the factors buoying the market against adversities and aims to gauge how long this positive momentum will persist, aiding investors in assessing risks. We need to understand who is having more weight on the market with various rationales from the Bulls' and Bears' Sides.

The Bears Grip

·       The Fed rate cut was significantly reduced from 6 cuts to 4 cuts and now it stands to 3 cuts which will drop to 2 rate cuts in CY 2024.

·       Further earlier the expectation of a rate cut was 300 bps to 175bps.

·       Iran and Israeli war eruption

·       Disruption in the Red Sea has already impacted the cost of shipping making goods more expensive.

·       Some products have seen an increase as high as 500%, while the average insurance premium has gone up 60%.

·       Oil prices have been rising recently in part due to geopolitical tensions and services inflation remains stubbornly high.

·       Industrial inflation is inching towards higher levels, and this leads to a steep cut down in forward earnings.

·       If the war breaks out, then this will escalate as a major war with many economies getting involved creating bottlenecks for the supply chain.

The negatives are getting nullified despite so many negative factors being discounted by the market. Well, it’s not the Modi factor which is keeping the market up. Its various macroeconomic unstoppable improvements keep the momentum of the market alive for new highs.

The Bulls

·       iPhone exports from India. FY 22 - $1.2 billion FY 23 - $5 billion FY 24 - $10 billion

·       Credit growth has accelerated and is tracking at a robust pace of 16.3% YoY as of March 2024 compared to 7.1% in December 2019 (pre-pandemic).

·       The ratio of credit to GDP has risen to 53.8% in F2024 from 49.7% pre-pandemic.

·       E-way bill generation touched an all-time high of 10.35 crore in March.

·       India's manufacturing PMI rises to a 16-year high at 59.1 in March 2024

·       During FY24 turns equity investors richer by Rs 129 lakh crore some stocks rallied up to 2,700%.

·       NSE registered investor base crosses 9 crores (90 million) unique investors (unique PANs) & 16.9 crores (169 million) total accounts

·       A total of 859 stocks on the BSE more than doubled investors’ money during the year 2023-24.

·       The major chunk of inflow is coming into the market from retail clients.

·       As of FY22, household savings in financial assets stand at Rs.28 trillion, twice the Rs.14 trillion seen in FY12.

·       Net Non-Performing Loans in the system are quite low at ~1%. Banking Tier-1 capital ratios are at a high of 15.7%.

·       Loan growth in the banks is trending near decade highs of 15% YoY. This compares with deposit growth of 12%.

·       On average, an Indian household holds 77% of its total assets in real estate, 7% in other durable goods (such as transportation vehicles, livestock and poultry, and machinery), 11% in gold.

·       India’s corporate sector has seen its Debt-to-Equity ratio reducing from close to 1.0x in FY15 to <0.5x in FY24.

·       India’s digital economy grew 2.4 times faster between 2014 and 2019, generating about 62.4 million jobs

·       The Indian Home Loan market has expanded at a healthy ~13% CAGR (growth in loan outstanding) over FY19-FY23 to Rs 29 trn

·       Institutional investments in the Indian real estate sector continue to rise at a steady pace, closing at USD5.4 billion during 2023, a 10% rise YoY.

·       While foreign investors continued to maintain a strong presence, contributing 67% of the total inflows in 2023, domestic investments have also seen an impressive YoY rise by 66% to USD 1.7 billion.

·       Expansion in the Indian home loan market and rising institutional investments.

·       Growing confidence in Indian markets from foreign and domestic investors.

 

Conclusion:

Despite initial scepticism, international interest in Indian markets is resurging, fueled by confidence in long-term growth prospects. While short-term geopolitical tensions may induce volatility, sustained liquidity and investment inflows shield the market. In one of my recent interactions and discussions with one Kenya-based IFA whom I had spoken to 2 years before and discussed India, she reverted that they are not looking towards Indian markets.

Now a week before she came back and enquired about Indian markets and looking ahead to get her client allocation for Indian markets.  The change in FPI and NRI investors has started happening. The geo-political war might create some short-term jitters but the long-term growth propensity remains intact. The reason why the market is not coming down is that there is enough liquidity in the market.

At the end of March, the total cash holding of all equity-based mutual funds stood at Rs 1.33 lakh crore. Then we have PMS and AIF funds along with the Insurance premium money followed by NPS and EPFO funds making a huge deployment opportunity which keeps any market fall protected from geo-political impacts. Further, as the election and exit polls start getting their reflection on the market, we will witness a huge surge in new investors coming and opening demat accounts and exploring investment options.   Further, as interest rates start coming down we will find the flight of capital from fixed-income products to equities which will get new highs for the market.

 Those who are looking ahead for long-term wealth creation and at the same time looking to reduce the blood pressure of doing lump sum investments now should opt for staggered investments. Since cash is the Devil when the market has so much to offer. It is not the Modi Factor but the Modi Reforms are playing the role behind markets new Highs.

 

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What we Do Not Know Behind Gold Price?

 

The global economy is already in the doldrums with Iran, Israel, and Hamaz tension over and above the Russia and Ukraine war. Commodity prices are set to increase and hence inflation increase cannot be nullified. Simultaneously as inflation goes up the forward outlook for interest rates will get reduced from 3 to 2 or maybe one from the U.S Fed. This will have a huge impact on reprising the equity valuations across the globe and hence new pricing outlooks will emerge in the coming days. Equity correction is bound to happen and hence it creates an opportunity for India to invest in the long term. Further many interest-sensitive sectors where the forward projection was that their earnings will grow as ROI falls will now get wait and watch mode and analysts will readjust the allocations in those sectors compared to what was envisaged previously.  On the other hand, healthy monsoon expectations for India followed by Mr. Modi getting his third term gives immense hope for long-term stability and progressive growth for India. The world now needs leaders like Mr. Modi so he can play a dynamic role in this global turmoil. Fear of COLD WAR Behind Gold The current rally in Gold has taken a good piece of mind of every investor across the globe and followed with this current geopolitical tension the value of the same will grow more.  However what I did not find in any media or research report that the actual reason for Gold being purchased in huge quantities by China and by the Big Central Banks. Well, it’s clear that what they envisage the rest of the world witness the same way later. The old school of thought of high inflation and hedging is now very old. The secrets behind the actions of the World’s Largest investors are often disguised and they can envisage those things which others cannot do. ·       Mr. Donald is going to contest for Presidential election in the U.S. Now his first election was influenced by Russia as per the media sources.  ·       When an election like the U.S. President happens one knows how much the same is being influenced by every country, by every billionaire, and by every powerful person on earth.  If he is going to win this time, then the same has been gauged by China and Russia. ·I  Readers will also accept that a character like Mr. Doland Trump is the need of the hour compared to any other person. Hence if he comes he will start the activities of the Trade war and will get manufacturing jobs out of China and many others. ·       If you remember the last time the same thing happened Gold went for a huge jump similar to the current one. ·       China has been reducing its U.S. treasuries and has now held 797.7 billion U.S. dollars in U.S. securities. In 2010 China had $3 trillion U.S Treasuries.   ·       If once again Mr. Donald Trum is back and Trade War 2.0 begins then many sanctions might be imposed which will create more problems for China, hence safe flight of exit is better now. ·       Trade war will push up inflation, and will change the supply chain, and hence that might be another reason why the U.S. economy is also not keen on reducing rates. ·       Another war funding preparation might be under the table which leads to huge buying of Gold and restricted actions on interest rates. But on the other hand, it has invested in Gold very aggressively. The PBC has been adding to its gold reserves for the past 16 months in a row, according to the World Gold Council. In 2023, the PBC bought more gold than all other central banks.  China’s central bank made its largest annual purchase in 2023 since 1977. China's purchases of the precious metal last year at 225 metric tons, roughly a quarter of the 1,037 tons bought by all the world's central banks. China's central bank now holds roughly 2,257 tons of gold in its vaults. Now why the central banks are buying Gold is also due to the expectation of geopolitical tensions and any Trade war escalation in 2025. Well, the price of Gold will jump significantly in the coming years mostly once the trade war bugle is blown. The currency will also react based on the geopolitical situations and will also impact the equities and other asset classes which will further push the price of Gold to new highs. Hence the current price is cheap based on upcoming predictions. Further, as China’s real estate and equity markets both are in the doldrums it's better to invest in gold and recoup the losses from this asset class in the coming years. Very clever act by China. On the other hand, global equity markets are at an all-time high, and any geopolitical shocks will get them down hence moving inflows from debt and equities into Gold is a safe option in every bad situation.  Once the interest rates start coming down China and its people could use Gold to pledge and increase consumption growth when in 2025 the situation might be worse for China or for the world. The Gold prices are currently much discounted if we compare with the unforeseen events expected to erupt starting from war to trade war.  Obviously, if we take the upcoming 5 years from now one will find that the global economy lacks leadership and this creates intense pressure on geo-political matters.

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Will You cut down on Midcap & Small Allocation in FY-25....An eye opener Insight

 

There has been a lot of noise in the market related to Midcap and Small cap and stress test results and in many places even the regulators are scared for the one-way rally of the segment. But did we try to find out where the inflows of the largest Industry of Equity Investments - Mutual Funds portray the final picture? What is the impact of the Stress test how do you find the inflows to carry forward and where do you find the retail India to invest from the 5% Equity allocation to 6% or 7% level?

Did you check where you have to rebalance and reinvest in the Financial year 2024-25? Will you follow the herd of the market or will you search for unique opportunities for wealth creation?

 Many investment advisors have given advice to invest in large caps and pull away from Mid and small caps. Few houses came up with the view of investing in Flexi cap rather than doing investments in Multicap and large caps. Then SEBI came up with some stress test numbers unreadable by investors and many financial advisors out of fear asked their clients to redeem their portfolio and shift into large caps and flexi caps.

 The recent data of the AMFI speaks that Small Cap witnessed profit booking whereas Midcap attracted inflows. The large-cap inflows were guided by two factors 1) One the large-cap underperformance became an opportunity for rebalancing from small-cap and midcap and 2)The large-cap rally will benefit from the Q4 results of FY-2023-24.

 Now in between the Midcap and small cap space corrected by hopping and lot of quality midcaps also corrected.  Even though the indices have been corrected by single digits, there are stocks in the market that have corrected by more than 50% to 70%. Segments like cybersecurity, artificial intelligence and emerging technologies hold growth potential for the information technology sector. Hence one will find quality Midcap IT companies to grow and create significant wealth in the coming years. If we look at the sector composition in midcap and small-cap space, we will find the manufacturing sector has more dominance. Now if the upcoming Indian GDP is focused towards manufacturing growth making India less dependent on imports and more one exports, we are bound to witness a major rally in midcap and small-cap space.  

 The biggest advice post-correction is that now you do the reinvestments back into those midcap and small stocks and Mutual Funds where you exited just a month before or a couple of weeks before. Re-investment is one of the biggest hurdles in today’s market. In March over 50 stocks with a market capitalization above Rs 500 crore plunged by 25% to 65%. Additionally, around 130 stocks have dropped by 20% to 25%.

 If we look at the AMFI data we will find Large Cap inflows for FY-24 was Rs.79694 cr compared to Midcap -Rs 113889 cr against Small Cap Rs 110317 cr. The numbers speak loudly that the Mid and Small-cap inflow in FY-24 was much higher and is still invested in the market and hence the valuation of the stocks will never come down historically it has come down or even expected to be down even in the worst nightmare. The strength of the Indian equity market is completely in the hands of the retail investors.

 The above data analysis does not include PMS or AIF. Flexi Cap, Multicap or Aggressive Hybrid etc allocation. Hence putting all those numbers in one place in a cumulative will push up the allocation in Mid and small cap to and new high. I hope now it’s well clear why SEBI’s stress test and other market rumours of correction will not play any role in getting reduced allocation. It is now a game of compounding for the Midcap and Small to have newer highs and more opportunity identification for investments.

 Even the Mutual Fund Industry stress test result failed to find any stress within Mid and small-cap categories. The beautiful thing is that all these activities led to a surprise correction in quality stocks and created new opportunities for the inflow of funds into this space.

 The retail investors of India are more risk-taking and they have more knowledge of portfolio and asset allocation models and they understand the midcap and small return story as compared to what an investor used to understand 20 years before.  The strength of the retail investor is proved when we find that retail investors have also pumped billions of rupees into mid- and small-cap schemes. In the calendar year 2023, small-cap and mid-cap schemes accounted for 40 per cent of the total net inflows into active equity schemes, receiving ₹64,000 crore of total inflows of ₹1.6 trillion. 

 Retail investors have always been on the lookout for a stock that would deliver multi-bagger returns within a year. The possibility of a large-cap stock generating a multi-bagger return is quite low due to their already established market positions with high market valuations. 

 If post-election we will find significant inflows coming in midcap and small-cap space and direct equity options are being explored aggressively. Between April last year and March this year, the average daily turnover in the cash space has jumped over 98 per cent, which showcases the strong demand for equity among investors.  Further, the average daily turnover of BSE equity derivatives contracts rises a whopping 2,400% to ₹34.6 trillion in FY24 from a mere ₹1.38 trillion in the preceding fiscal year. NSE’s turnover jumped 111% to ₹324.9 trillion in FY24 from ₹153.5 trillion in FY23.

  This reflects the maturity of the investors in the market. Furthermore with Nifty lot size being reduced to 25 will lead to more aggressive inflows from the retail clients.  Indian benchmark Nifty delivered robust returns, rising around 25 per cent in FY24 despite having higher global interest rates and geopolitical tensions across the globe.   Now when the tide is going to turn on the other side what numbers will come up on the table is very clear and so as the retail investors who will join the market post-election results of June 2024. In fact, we will find a surge in account openings once the exit poll numbers start rolling out. One will find significant rallies in quality midcap and small-cap post the correction and the major drive will be pre and post-election rallies, which one might call a biased rally. Further, once the ROI starts coming down the earnings will start picking up which will give a significant boost to the midcap and small-cap space.

 The midcap and small-cap companies are not leveraged as they have been historically. They are in a much better position compared to what it used to be 20 years before.

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