Srivastava believes that any potential correction in this segment could offer a chance to buy well-positioned companies at a discount.
“While near-term volatility remains a possibility, the long-term outlook for smallcaps appears promising. The valuation levels for some smallcaps do warrant caution and the volatility before elections was expected,” she said in an interview with ETMarkets. Edited excerpts:
What’s the fate of mid- and smallcap stocks after the recent stress test results released by AMCs?
Sonam Srivastava: The recent stress test results by AMCs spotlight potential vulnerabilities within specific mid- and smallcap companies. This doesn’t necessarily spell doom and gloom for the entire segment, but it does necessitate a relook at our allocation and diversification.
Strong companies with sound financials and a proven track record might present attractive buying opportunities if their share prices experience an excessive dip in response to the stress test results.
This could be a chance to acquire well-positioned companies at a discount. Conversely, companies with underlying weaknesses exposed by the stress test, such as high debt levels or weak cash flows, could face continued pressure.
Investors should carefully analyze the financial health and future prospects of companies inthis segment before making investment decisions.
Smallcap strategies of most PMS funds, including yours, were under pressure in February as reflected in the 1-month return. Do you expect the trend to continue?
Sonam Srivastava: The pressure on small-cap strategies in February, including mine, can be attributed to short-term market volatility. Factors like margin funding and investor flows can cause temporary fluctuations in small-cap performance. While near-term volatility remains a possibility, the long-term outlook for smallcaps appears promising. The valuation levels for some smallcaps do warrant caution and the volatility before elections was expected. A cautious and value-oriented approach is advisable. In this environment, one can’t be tempted to chase overheated valuations or companies with unsustainable growth projections. Focus on identifying companies with strong fundamentals and a clear path to profitability.
What’s your medium-term outlook for small and mid-cap stocks? Are you turning conservative in this segment?
Sonam Srivastava: The medium-term outlook for small and mid-cap stocks is cautiously optimistic. Several factors can contribute to stock price appreciation in these segments.
Continued earnings growth, fueled by economic recovery and expansion plans of these companies, is a key driver.
Additionally, a pause or potential cut in interest rates, as hinted by the Fed, can improve access to capital for these firms. This can allow them to invest in growth initiatives and further bolster their profitability.
However, a conservative approach focusing on quality stocks with strong fundamentals is still prudent. This is not a time to get caught up in short-term trends or speculation.
How do you expect the industry to approach the mid- and smallcap universe?
Sonam Srivastava: The industry is likely to adopt a more discerning approach towards the mid- and smallcap universe in light of the recent stress test results. We can expect an increased emphasis on identifying companies with robust business models and a proven track record of financial performance.
These companies will likely have strong management teams, healthy balance sheets, and sustainable competitive advantages. Additionally, we can expect active portfolio management strategies to be employed.
This means that fund managers will closely monitor their holdings and be prepared to adjust their positions as needed to mitigate potential risks highlighted by the stress tests. This shift towards a more cautious and quality-focused approach should benefit investors seeking stability and controlled risk within the mid- and small-cap segments.
With the Fed retaining its guidance of 3 rate cuts in 2024, what does this mean for a market like India?
Sonam Srivastava: The Fed’s decision to potentially cut rates three times in 2024 presents a two-pronged opportunity for the Indian market.
Lower interest rates in the US can lead to a global increase in liquidity, potentially attracting a portion of this new capital towards emerging markets like India. This could boost the Indian stock market and lead to higher valuations for Indian companies.
Additionally, lower borrowing costs for the Indian government and companies can improve their financial health and fuel growth through increased investments and expansion. However, the ultimate impact hinges on global economic conditions. If a global slowdown coincides with the rate cuts, it could dampen investor sentiment and limit the positive effects on the Indian market.
PSU stocks had a stupendous run in FY24. Is there more steam in this euphoria?
Sonam Srivastava: The phenomenal run of PSU stocks in FY24 might be nearing its peak. The initial surge could be attributed to factors like government reforms and pent-up demand.
As these factors normalize, so too might profitability growth for PSUs, leading to a potential correction in stock prices as they adjust to reflect more sustainable long-term prospects.
Additionally, some PSU stocks might be trading at inflated valuations, potentially indicating a bubble. Investors should carefully evaluate individual PSU companies based on their future growth prospects, efficiency improvements, and potential government support plans.
Focusing on PSUs with strong fundamentals and a clear path to sustainable profitability can help navigate potential volatility in this segment.
How does FY25 look for India Inc from an earnings perspective and investment opportunity?
Sonam Srivastava: FY25 holds promise for India Inc.’s earnings due to a confluence of factors. A potential economic recovery fueled by government spending and increased consumer demand could translate into higher revenues and profitability for Indian companies across sectors.
Companies positioned to benefit from this upswing, such as those involved in infrastructure projects, construction materials, or consumer goods due to increased government spending, could see significant earnings growth.
To capitalize on this potential, investors should conduct thorough research to identify companies with strong management, a healthy product pipeline, and the ability to leverage the anticipated economic upswing in FY25.
In the run-up to the elections, what investment strategy would you recommend to investors?
Sonam Srivastava: The pre-election period can be a time of heightened market volatility. To navigate this turbulence, consider a staggered investment approach, investing small amounts periodically to average out costs and potentially mitigate the impact of short-term fluctuations.
Additionally, focusing on MNC companies, large caps and defensive sectors like FMCG or healthcare, which cater to essential needs and experience relatively stable consumer demand regardless of the political climate, can provide some portfolio stability.
Finally, maintaining diversification across sectors and asset classes is crucial. Don’t put all your eggs in one basket. By spreading your investments, you can help mitigate the impact of a downturn in any specific sector during the election period.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)