‘Valuations of smallcaps ahead of fundamentals; tough to predict RBI rate cut’

Edited excerpts:

What is your view on the current market structure? When can we expect a fresh bullish wave?

We will be closely monitoring the upcoming general elections and the escalating crude oil prices as they are key factors shaping the economic landscape. 

The government’s announcements regarding economic reforms and initiatives to boost consumption are expected to act as catalysts for the markets. 

However, caution is advised when considering investments in the small-cap category. 

Valuations have surged far ahead of fundamentals, raising concerns about potential market corrections. In addition to small-caps, we are also vigilant about micro-caps, where the situation appears even more dangerous. 

Valuations in the micro-cap segments have reached absurdly high levels, creating discomfort and making it challenging to discover viable investment opportunities. 

In this environment, prudent investors should strike a balance between optimism and caution, by being discerning in their investment choices, particularly in the small and micro-cap sectors.

What are your expectations on the interest rates front? Can the RBI continue maintaining a pause on October 6? When can we expect a rate cut?

The expectation currently is that the Reserve Bank of India (RBI) will maintain its existing interest rates. 

The global crude oil price hovering around $100 does pose a challenge to our economy, but it is worth noting that the RBI has a history of effectively managing liquidity in such circumstances. 

Attempting to predict whether a rate cut will occur in the first or second half of 2024 seems futile from a bottom-up perspective. 

However, it is important to acknowledge that a delayed rate cut in 2024 could potentially dampen market sentiment. 

As we navigate this uncertainty, investors should consider maintaining some dry powder—unallocated capital that can be readily deployed when lucrative opportunities arise. 

This approach provides flexibility and readiness to capitalise on market shifts and emerging prospects. 

In summary, while the RBI’s rate decision is difficult to predict, prudent investors should focus on staying prepared for potential market developments and maintaining the agility to seize opportunities as they present themselves.

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Do you see any matter of concern on the macroeconomic front? What could be the impact of a global economic slowdown on India?

India’s economy stands out as one of the most resilient across both emerging and mature markets today. There are currently no indications of an economic slowdown. 

In fact, businesses are currently reporting record profits, underlining the robustness of the Indian economic landscape. 

One key contributor to this resilience is the government’s substantial support for small and medium enterprises (SMEs) and micro, small, and medium enterprises (MSMEs). 

Their contributions to India’s economic vitality cannot be overstated, and the government’s assistance has played a pivotal role in bolstering their growth. 

As we look ahead, it is evident that India is poised for a decade of substantial growth. This is in stark contrast to China, which continues to grapple with recovery challenges. 

The opportunities for growth are likely to span across nearly every sector of the Indian economy. 

The primary question that remains is which specific sectors and companies will capitalise most effectively on these forthcoming opportunities.

Our commitment lies in identifying and seizing these opportunities to generate commendable returns for our investors. 

In this environment of optimism and potential, our focus remains on strategic positioning to harness the growth potential that select companies offer for the years to come.

What sectors can lead the next leg of the rally?

In my view, the pharmaceutical sector holds significant promise, but it demands a cautious, stock-specific approach. 

This sector has recently demonstrated commendable returns, partly fueled by increased M&A (mergers and acquisitions) activity, including de-mergers, buy-outs, and spin-offs. 

Investors would be wise to closely track these corporate actions, as they have historically generated superior returns. 

However, it is essential to note that our portfolio management strategy remains sector-agnostic. 

We actively seek value across diverse sectors, not confining ourselves to any single industry. 

Presently, our bullish sentiment extends to construction, banking, infrastructure, and realty sectors. 

In summary, while the pharmaceutical sector shows potential, we maintain a flexible investment approach, diversifying across sectors to unearth value. 

Our current optimism centres on construction, banking, infrastructure, and realty, reflecting our commitment to adapting to evolving market dynamics and opportunities.

Can we still bet on PSU banks? Do you think this space has some steam left?

When considering investments in PSU (public sector undertaking) banks, it is imperative to avoid a blanket approach and instead adopt a more selective, stock-specific strategy. 

Within the PSU banking sector, there exists a spectrum of valuations, ranging from extreme overvaluation to pockets of rationality. 

Recent market trends have demonstrated substantial price surges in certain PSU bank stocks with low float and sub-par fundamentals, cautioning investors to steer clear of such names. 

While some PSU banks do offer reassuring valuations, it is crucial to acknowledge that several private sector banks are experiencing exponential growth, making them more appealing investment options at present. 

In summary, the viability of betting on PSU banks varies significantly depending on the specific stock in question. 

Therefore, careful analysis and consideration of the individual bank’s fundamentals and market position is essential before making investment decisions.

Is the worst for the IT sector behind?

The worst for the IT companies was in the price three months back. Regrettably, the recent surge in small to mid-cap stocks has skewed investors’ expectations, leading them to underestimate the time required to realise returns in the market. 

While the worst may be in the past for the IT sector, prudent investors are advised to extend their time horizon, recognizing that sustained growth often demands a more patient and strategic approach in today’s market landscape.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 02 Oct 2023, 11:51 AM IST