ITS TIME FOR MID & SMALL CAPS WITH BLEND OF LARGE

 

The markets are scaling new highs and every investor is confused about its investments. The debate is between pulling out funds or investment funds into the markets. The large-cap, mid & small cap debate is another subject that keeps investors under confusion.  In the month of May 2021, Sensex gained around 6.61 %, recording the sharpest May. The Sensex, for instance, currently rules at 32x the price-earnings multiple — 25 per cent higher than 25.5x PE multiple of the world’s best-known index, the Dow Jones Industrial Average. The Sensex is also the most expensive in Asia, almost twice as expensive as the Shanghai Stock Exchange. One of the biggest questions in mind is when the markets will fall? Well, market may fall or may not but sector-rotation possibilities are high now and this will be growing significantly in the coming days. Contra sectors will attract inflows hence some portfolio might get redemption but the flow will be back again into other sectors.

 Indian equities do look expensive from a valuation perspective and, therefore, we believe that on a headline basis, it might be difficult for the markets to keep making new highs for a sustained period. Hence the market new highs will be backed with some new fundamental or revenue sources.    Currently, contra based investment approach works better. For example, Power companies have been reporting multiple new projects in the power transmission space and infrastructure has been inching towards the forefront.

 What we need to understand is the source of growth of the market in long term and which segments will be playing into the new highs. Currently, nearly two-thirds of Nifty 50 components are trading at a premium to their historical valuations. Last week the benchmark index made fresh highs on three occasions. The 50-share index currently trades at a price-to-earnings (P/E) multiple of over 20x on a 12-month forward basis — a premium of 8 % to its 10-year average of 18.8x.

 The market will get more inflows from the IPO segment where it is being expected that we may see record ~2-3 trillion ($30–40 billion) worth of equity supply in FY22, with 40% of this being raised via initial public offerings (IPOs) and that too from institutional money. 

 If we look at mid and small-cap space we find Valuations have turned expensive, but only in pockets. Many fundamentally sound companies in the small-cap space have robust business models and strong balance sheets. They are gaining market share at the expense of their weaker peers or the unorganised sector.  This unorganised segment gives an edge up to the mid and smaller companies.  Many smaller companies with differentiated or niche business models, operating in high-growth segments, are bound to do well. On the other hand, corporate revenue to GDP also inched up to 34.4 % in FY21, up from 33.6 %. Midcaps cost segment is very much well restructured and valuation will rise as a business will open up.

 At the same time unlocking itself is a growth momentum for the market. Hotels and restaurant side will not be able to attract significant growth now as commodity inflation pushes the prices and makes it expensive for consumption at these uncertain times of pay cuts, job cuts etc.   The growth from this segment will come post 3 months from now provided 3rd wave don’t come.

 Coming to markets we find that Midcap and small-cap segment to perform well for the next 3 years from here. 3 years since every investor has short patience but as we all know that mid and small caps over the decade is one of the best investment basket provided one has patience and review properly.  In the past year, we have seen as many as 383 small-cap stocks from the BSE Small-Cap index constituents more than double their returns with an impressive 20 stocks that gained over 500 % in the past year. Only 15 stocks turned out to deliver negative returns in this period.

 The focus will be on infrastructure projects in the coming months since as per CMIE we find that new investment projects announced — a good indicator of investment intentions in the Indian economy shows that the aggregate amounted to Rs.5.18 trillion in FY21, which is the lowest since FY05 when it was Rs.5.63 trillion. There was an uptick in new investment proposals in March 2021 quarter to Rs.1.52 lakh crore; this was far higher than Rs.1.16 lakh crore in the December quarter and Rs.96,000 crore in the June quarter; proposals for the entire FY21 stood at Rs.5.1 lakh crore. This is the key place where inflows and growth focus will play their game.  Apart from the asset monetisation mechanism it's being found that InvITs, REITs, will play a bigger role in channelizing domestic investments. The assets managed by InvITs and Real Estate Investment Trusts (REITs) have grown at a compound annual growth rate of 42% since FY18 to around Rs2 trillion.  Opening up investment projects would be a key driver for growth in the coming months for the stock market.

  If at all there is bleeding in any sector or industry it will be quickly staunched by fresh support packages. Liquidity pumping, incentives and cheap assistance looking for value are propelling the unlikeliest of stocks into stars at the first hint of turning the corner.

 Those who are thinking Inflation will pull down profits for the market well the adverse impact on the margins of the auto, consumer staples, and consumer durables sectors will be counterbalanced by an earnings uptick in the metals, cement, and oil and gas sectors as these are commodity-driven. Further 80% of the BSE stock exchange companies are export-oriented. India exported merchandise worth $32.21 billion in May 2021, 67% higher on a year-on-year basis and nearly 8% over May 2019’s pre-pandemic numbers. Hence this is a great area where the stocks and sector performance will grow and vice-versa the market will also grow significantly. The growth was driven by a rise in demand for engineering goods, petroleum products, gems and jewellery, pharmaceuticals and iron ore.

 So the market has significant events lined up. The unlocking, monsoon, agriculture growth and then the industrial growth all will play their game. Liquidity is enough but the only focus area is manpower supply or labour flowing back to urban.  A blend of large-cap and mid & small cap would be better since a 3rd wave chance can change the game upside down. Further cash-rich, sound management, digital business model, strong supply chain of companies in the midcap category will play a significant game.