Let us understand what is the way forward for small and midcap stocks and I will break it into two or three points here, first, for the mid and the smallcap stocks as a cycle; second, where are they headed in terms of a theme and when will the momentum really come back in some of these stocks?
Aman Chowhan: First thing is, see, there is always this assumption that it is largecap versus midcaps. Normally, it does not happen that way. At any given point of time, there will be some largecap that will do well, some midcap that will do well, irrespective of the cycle. Now, currently, we had good three, three-and-a-half years of mid and smallcap outperformance and we are giving away some of that outperformance, that too only those stocks which have gone to 50-60 PE have corrected the maximum.
So, it is not that overall as a basket, mid and smallcap have corrected. Yes, there is some technical factor, liquidity factor, retail investment or interest was maximum in this space which is obvious, and hence that is where the maximum selling is.
Because as far as institutions are concerned, us or whomever I have spoken to, there has been no redemption in the MF or in the PMS, AIF space. So, it is predominantly retail that has been selling and that is where the maximum interest was and that is the reason we have seen a sharp correction in the mid and smallcaps. Going ahead, the whole market is waiting now for these numbers to pick up.
There has been some pickup, whether in GDP numbers, in earnings growth, or in top line or something for it to get some trigger or some reason to be bullish about or to add on to what the current holding is, so that is what the whole situation is.
Mid and smallcap will start to do well once you see the numbers coming in. There are some sectors coming in where numbers are still strong, maybe the PE went up too high, which has now corrected, and it will stabilise at current levels.
And overall, once the market starts to see some momentum, these stocks will also perform in that. So, it is not a largecap versus the midcaps. Within midcaps and within largecaps, wherever we see earnings visibility, those stocks will outperform for sure.
Where are these midcap dominated schemes headed and for those who have a exposure, direct exposure or indirect exposure via PMS or via mutual funds in small and midcap stocks, what should they do now, just bear the pain, move to largecap or perhaps add more to the current commitment?
Aman Chowhan: I think bear the pain, add to it over the next six months, nothing in a hurry and then maybe the six months is the consolidation phase or time correction or whatever word we use for it, it is time to put capital to use and you will reap the benefits of that capital maybe post five-six months once dust settles globally, what Trump wants to do, and what retaliation other governments or countries will do and India also whatever measure the government has taken, both for the consumption as well as the capex starts getting reflected and we see a pickup in the GDP numbers, earnings growth numbers is when the markets will again start to give you a healthy return.
So, very realistically, what should be the index return expectation for this year, both on the Nifty as well as the mid and smallcaps?
Aman Chowhan: Can be flattish to maybe 5-10% up and down, not more than that, either ways. That is the other thing, one is wondering how soon before the pain gets resurrected and more importantly, whether or not you will have to live with this kind of gut-wrenching volatility on a daily basis for the next foreseeable future.
Aman Chowhan: I think volatility is going to stay because there is uncertainty both locally as well as globally. Earlier there was volatility globally, but locally we were doing strong, now that is not the case. So, when there is uncertainty, this is something that the markets do not like at all and hence, right now even the momentum or confidence or sentiment everything is weak, so the volatility is going to stay.
It can get worse before it gets better, that is what the scenario is because we all know market is extreme on both sides when it is rising and when it is falling, so we are somewhere midway right now.
It is not that we have seen the bottom and the worst is over kind of thing. At the same time, we have seen a decent correction. It is not that we are going to fall another 30-40% from here on, maybe 5-10% from current levels is possible in the near term before we start to recover.
10% on the Nifty?
Aman Chowhan: Overall, yes. Nifty could be less because see within Nifty banking is the highest overweight where this whole segment is looking good, that segment has not performed in the last two years, there is not much of a downside there.
IT will continue to do well because of the currency. Pharma, we have seen in spite of whatever the tariff news today, stocks are just down 2-3%, maybe in a week or 10 days’ time they will recover that also.
So, the heavyweight consumers because of the budget and the measure the government has taken, there is not much of a downside. The Nifty might not, but the broad index or broad stocks can further correct 5-10%.
That may be a very tactical approach, but if one has to look at the recent correction that has played out and sort of rework your core portfolio or assume someone is making their portfolio afresh, what kind of an allocation would you recommend to them, both market cap-wise and of course any stocks or sector selection?
Aman Chowhan: It is more to do with the person as to what kind of risk appetite he has, what kind of time horizon he has. But broadly, it will be very popular to say that stick to largecaps, it is volatile times and hence this is the best way to go in. Yes, it is.
But if somebody has a three to four-year view, then at least 50-50 should be the allocation between midcaps and largecaps because ultimately, Indian equity market is all about midcaps.
This is where the maximum opportunity is. We all know the largecap, we all know these companies are good companies, but it will give you a normal return.
If you need to generate an alpha, you need to look at mid market. You need not go to a small or a micro-cap, but at least midcap should be in the portfolio because that is where the entrepreneurial spirit and the growth potential of India lies.
Since one talks about mid and smallcaps the one place where people have really burnt their fingers, assuming of course on when their entry point was, is in the entire PSU pack. And we were just taking stock that from the 52-week highs sectorally, it is the PSE index which has fallen a lot more and top of your mind comes those defence and railway names. I think that is where the first signs of a correction actually crept in firstly. What is your thought on that and would you have any of the defence and railways names in your portfolio at all?
Aman Chowhan: Six months back, PSUs, defence, and railways were the best performing sectors, that is where the maximum rally was and stocks had re-rated to north of 60-70 PE and that is where the maximum correction has happened or the PE correction has happened and that 70 PE is now at 40 PE.
We did not participate a year back. We had no defence stocks a year back also. So, we missed on the rally, nor have we yet got into those defence names because the 70 PE has come down to 40 PE. 40 is still not an entry PE for us. If it comes on further, maybe we will look at it, but not at these levels.
So, we never participated in the upside, nor have we got burnt in the downside that we have seen in the last few months. Overall, as a sector, we like it because of macro positive, there is a clear government focus on what these companies are intending to do and the government wants to cut the import bill, which is very clear, but valuation is what the concern is because ultimately these are government policies dependent companies.
Government decides what to buy, when to buy, what margins, how to pay, when to pay, and so forth. For these kinds of dependent companies on government, you cannot have a 30, 40, 50 PE, which the market was paying because it was seeing growth, which is true. Yes, they will not trade at 5-10 PE the way it used to trade five years back, but maybe somewhere around 20-25 PE would be the right multiple for this sector.
What is your take on the railway pack as well because what we have seen is that it is a sharper correction there, almost a 40% to 50% decline from those 52-week high and a lot of retail investors have a feeling of getting stuck there. Do you believe that once again, it is time to look at that particular sector after the valuation correction or time to stay away still?
Aman Chowhan: It is time to stay away because as I mentioned 80 PE has become 60 PE or 50 PE. We do not have it, there is no hurry at least in our mind to look at them at the current value.
In this market what is something which has corrected where you said that look I like the business, I wanted to buy the business, I was not very happy with the valuations. The correction could have happened because of technical factors, it could have happened because of liquidity issues, but what is that one pocket, name or theme which you thought at the beginning of the year, I will buy it if I get them 20% cheaper?
Aman Chowhan: Capital goods for sure have corrected 30-35%, that is looking good, except the top, the MNC names which are like 50-60 PE, otherwise they are now at 25-30 PE, this is where the momentum right now is, that segment is looking good.
Even midcap IT. The largecap IT has not corrected, but mid or smallcap IT has, that segment is also looking good. EPC companies, they have all corrected 30-35% and now trade at 10-11-12 times forward earnings, which is a very good entry multiple for this segment because the government spending is now picking up post the elections and post whatever we saw over the last few months, now clearly the budget allocation is there that the government is going to spend, so the order book positioning of these companies is going to swell, plus at 12 times it is a good segment to look at.
So, these would be the three segments that has caught our attention and we have started nibbling at these names now.
What are the fundamental changes you have done in your portfolio? For example, same time last year or maybe 18 months ago, you did have exposure to let us say railway stocks, Texmaco, I am looking at your declared portfolio, that is out. What are the big changes which you have done in your portfolio because of valuations or because of the economic turn?
Aman Chowhan: So, we have cash in our portfolio, this is not a cash call that we do because we do not do that, but whoever has in the last six months, that portfolio has been 70-80% deployed, so we were gradual and cautious in deploying any new inflows that we got.
Certainly cash holdings now, which we are now going to deploy over the next say maybe two to three months kind of scenario.
Sectorally we have added more of financials, we have added more of pharma, we have added bit of metals a few months back. Within consumers you know, we do not have much of consumer exposure, but post the recent direction of budget measures and everything, there is a bias towards getting into consumer discretionary, we are still not convinced to get into consumer staples, but discretionary is something that we are now actively looking at, maybe we will add some exposure there.
So, there has been some sectoral shift in that sense, so you will see more of consumer in our portfolio versus say two years back.
PSUs was never there, that is not going to be the case. IT could be higher, it was high single digit a year back, it could get into mid-teens kind of levels in the next few months. So, these are some of the sectoral changes that we have taken at the macro level for the portfolio.
Since you just talked about the pharma space, within that any particular segment that you like at this point in time and I also wanted to have your take on the whole of the announcements related to Donald Trump making the headlines and also saying that there could be a 25% tariff imposition for the pharma imports, what is your sense on that, is this situation likely to occur or you believe that given the large exposure of the Indian pharma players, that could be a little tough task to go ahead and implement?
Aman Chowhan: Very difficult to say because we do not know the announcement that Trump is making, what is that real intention, whether he wants to negotiate or he really wants to do it. He is a businessman first, politician later, that is what I personally feel.
So, if you are putting tariffs, you are importing inflation, everything gets expensive, this is not consumers are going to like, so I am sure he has something else in his mind also, it is not just going to be a blanket 25% tariff across the board because it is not going to be easy that everything then gets manufactured in US, it does not happen overnight.
Broadly, what he is doing is something that we are also doing in India, what Modi is Make in India, Atmanirbhar Bharat and everything, that is what they also want to do but it does not happen overnight and if you have a tariff overnight, then it is going to be a disruption in the near term.
So, we also do not know exactly what is going to happen and also more importantly, we are seeing only one side of the coin as to what Trump is doing. We also need to see as to how people retaliate if there is a 25% tariff and he signs that order and that is going to be the law of the order, then the exporting country will also do some measures, maybe devalue the currency, maybe he will have a counter tariff or something, that is also going to be equally painful.
Right now, the whole focus is only Donald Trump, we also need to see how others retaliate and that is the reason I said in the near term things will be volatile because it is not just Trump, how people act to it is also going to add to the volatility in the near term.
