Investors need to be careful in mid- and small-cap space: Aamar Deo Singh, Senior Vice-President - Research, Angel One

When there is a bull market and there is a credible economic growth story, even negative news flows and events get absorbed by the markets and the up-move continues. With India’s economic growth outlook continuing to remain positive and the world looking up to India as a major global growth engine, it is bound to have a bullish impact on markets. Further, billions of dollars’ worth of investments flowing into the stock markets, both domestic and international put together, along withinvestor interest across sectors... all spells positive for the markets.

The benchmark indices are up almost 12 per cent YTD, post the major correction witnessed on June 4 — when the election results were announced. Going forward, the trajectory taken by inflation, quarterly results, interest rate cut signals by the US Fed and the US Presidential elections slated in November will be crucial drivers determining the direction of the markets. Further, domestic and FII flows are also to be closely watched, as they have a direct bearing on market fortunes. Investors need to adopt a more cautious and prudent approach going forward, given the fact that a significant number of stocks are trading at expensive valuations; adopting a judicious stock selection becomes paramount.

The mid-caps and small-caps have definitely fuelled this broad-based rally with the benchmark mid-cap and small-cap indices, too gaining 24-25 per cent YTD, reflecting the overall investor interest in these categories. Historically, these categories have generally been seen to deliver the highest returns but at the same time, in a downtrend, the erosion of wealth has also been the fastest. Hence, it’s a very clear case of trade-off between the risk and reward that investors are willing to partake.

One can definitely say that in most of the pockets, valuations are expensive and investors need to be careful and not simply get carried away by the loft valuations and projections alone. It’s always best to stick to quality companies and that too, in an SIP stock investment model, with a minimum of three-five years investment horizon. The Price/Earnings ratios of many of such stocks are trading at record levels, hence it becomes pertinent to be mindful of the same and invest in a systematic manner, going forward.

Expected on July 23, the first Budget of the Modi 3.0 government is sure to raise expectations for all — investors, traders and corporations. The Budget is expected to prioritise the following areas: creating jobs, reining in inflation, building infrastructure, providing incentives to the manufacturing sector including defence, giving the agriculture sector a big push, and, most likely, lowering taxes on a certain group of taxpayers, mostly those in lower income-tax brackets, in order to put more money in their pockets and support spending. The annual Budget exercise generally tends to build up a lot of euphoria before and post Budget, markets accommodate the announcements and move on their previous trajectory. So let’s adopt a wait-and-watch approach.

Capital gains tax, a very complex subject, has a significant bearing on the fortunes of the markets, and any change is bound to have an immediate reaction in the markets, depending upon how the markets perceive it to be. Simplifying and reducing slab rates is something few investors believe is a possibility.