Mid and Small Caps: Bet on urban consumption
The action of the Federal Reserve does not really matter to the Indian market as it has already been discounted, says Shailesh Bhan, Deputy CIO, Reliance Capital Asset Management. He thinks that with India emerging out of cyclical lows, earnings are likely to improve rapidly.
Global volatility and correction over the last few weeks have created good price points for investors. Volatility does not mean risk for long-term investors but is a disguised opportunity. ‘Volatility is a friend of prepared investors.’ Hence, investors should adhere to their financial goals and can consider increasing equity exposure based on their asset allocation.
Do you think that once the Federal Reserve embarks on tightening the monetary policy, liquidity will be impacted, affecting stock prices?
US interest rate hike has been in the news for a long time and a rate increase during this calendar year is already discounted by the market. Hence, a lot of impact for this perceived risk is already captured by the market.
We have witnessed over the past few years that market fears an event for months and when the event actually unfolds, the reaction is, in fact, positive. This happened across events like fiscal cliff, QE tapering, Greek election, etc.
Do you think Indian equity is better placed than other emerging market stocks? Why?
Indian economy is on the cusp of a turnaround backed by strong fundamentals, such as current and fiscal deficit trending lower, subsidy burden falling, inflation at multi-year lows and a falling interest rate environment.
Indian equities/businesses have strong ROE focus. Indian markets offer a diversified investment opportunity for investors unlike some peers that depend on a single commodity theme. India is emerging out of cyclical lows and earnings are expected to grow rapidly. Hence, given all these advantages, we believe Indian equity markets are better placed than other emerging markets.
With the CNX small-cap index still trading at a PE of around 50, are small-caps to be avoided now?
Large-cap market valuations are reasonable given the low base of earnings and the cyclical recovery which can unfold over a period of time.
We had seen good quality mid- and small-cap stocks with established track records correcting meaningfully in the recent past and offering investment opportunities for long-term investors.
What are the themes that investors should watch out for while buying mid-cap stocks?
We remain optimistic on themes which can benefit from the domestic growth and a few themes like urban consumption, engineering, hospitality, retail, etc., appear interesting from a long-term perspective.
What is your view on consumption?
Urban consumption, after a challenging period of three to four years, is reviving. The rural consumption is relatively weak due to lower support prices.
However, we believe as the pace of recovery improves, even rural consumption will revive and monsoon may not have a significant long-term impact.