It is expected that mid and small cap baskets will deliver 7-9% higher earnings growth than Nifty basket over the next two years, says Harsha Upadhyaya, CIO – Equity, Kotak Mahindra AMC.
“This sort of higher pace of earnings growth is crucial for sustenance of mid and smallcap valuations which are at all-time high premium levels as compared to that of large caps,” he says. Edited excerpts from a chat with the fund manager:
Equity MF flows dropped in March and smallcap funds finally saw a trend reversal. Would you call this an aberration?
Harsha Upadhyaya: The trend reversal in terms of flows into the smallcap category was witnessed after more than two years of continuous positive flows into the segment. The SIPs have however continued on a strong trend though. The nervousness in the market also seems to be abating. Given all this, it would be too early to suggest it could be a trend reversal.
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Stepping into FY25, do you think the overall market returns will moderate or do you continue to see double-digit returns?
The earnings trajectory in FY25 and FY26 is expected to be quite healthy with expectations of mid-teens growth. However, the valuations are continuing to be higher than long term averages. Even if you assume some moderation in market valuations, if the earnings delivery continues as per expectations then it is likely that one can hope for double-digit returns over the medium term.
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Many argue that while valuations have moved above the long-term averages for midcap and smallcap stocks, earnings growth has not been in sync. Do you think this catch up could happen over the medium term and justify valuations?
Harsha Upadhyaya: Currently, it is expected that mid and small cap baskets will deliver 7-9% higher earnings growth than Nifty basket over the next two years. This sort of higher pace of earnings growth is crucial for sustenance of mid and smallcap valuations which are at all-time high premium levels as compared to that of large caps.
There are heightened expectations of significant inflows into the debt segment this year following India’s inclusion in the global bond indices. Do you think this year could see inflows into equities moderating?
Debt flows are driven by very different factors and hence, are unlikely to eat into equity flows. Indian equities will continue to be a favoured investment destination for foreign investors in light of strong economic growth and corporate earnings growth, policy momentum and expected currency stability. However, relatively higher Indian equity valuations will weigh on investors’ minds too.
In FY24, capital flows into equities from FPIs as well as DIIs ran parallel, and adding to it was retail money. What does the flow picture look like for FY25?
Harsha Upadhyaya: We expect reasonably strong flows even this year from both domestic and foreign segments.
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With interest rates seen moving downwards this year, which are the sectors that could throw opportunities and you would bet on?
Harsha Upadhyaya: Some of the interest rate sensitive sectors such as real estate and auto have already been on an uptrend. We continue to favour domestic cyclicals across our portfolios. However, given higher valuations currently we may see more of stock specific performance rather than sectoral trends.
While India remains one of the best emerging markets to bet on today, what are the potential risks that investors need to be aware of?
Harsha Upadhyaya: Market valuations, especially of mid and smallcap categories, continue to be one of the prime risks. One needs to keep an eye on crude oil price movement given the volatile situation in the Middle Eastern region, which could have an adverse impact on the economy as well as corporate margins if there is a sustained spike.
Besides equity, which other asset class looks attractive for investors to participate in?
Harsha Upadhyaya: We expect interest rate cuts going forward as inflation trends are moderating. Hence, even fixed income exposures can provide reasonable returns. Given geopolitical uncertainties around the globe, gold may also remain a favoured asset as a safe haven.
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(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
