What’s your view on mid- and small-cap valuations at this juncture ?
Mid- and small-cap companies have had an impressive run in the last two years, driving valuations much beyond their historical averages. The recent correction post-demonetisation has brought some degree of reasonableness to their valuations. These stocks could become interesting from a 2-3 year perspective if they go down by 8-10 per cent from current levels.
We continue to believe in the India consumption story and the current slowdown at best seems temporary in nature, which is likely to normalise as currency comes back in circulation. We also expect the Government to announce some positive measures in the upcoming Budget to boost consumer confidence. The other factors that are likely to have a positive impact on consumer discretionary demand are the impact of the Seventh Pay Commission, a good agriculture season, government’s spend on affordable housing, improving power availability, among others. We continue to like the consumer discretionary space and feel that the current slowdown provides a good opportunity to look at the same from a slightly long-term horizon.
Currently we are overweight on consumption-oriented segments in our small and mid-cap funds. Besides we believe categories like banking and finance, healthcare, specialty chemicals and agrochemicals could outperform in 2017.
How would demonetisation affect the performance of mid and small-cap stocks?
The effect of demonetisation has been felt by almost all domestic-oriented companies, but to varying degrees. In the initial few days, the extent of demand destruction was quite high, with sales declining in the range of 60-80 per cent on an average. The impact was more pronounced where the nature of business involved a higher degree of cash transactions. However, many categories have seen some recovery in demand in December, and our channel checks suggest that as the cash availability improves, we could see a gradual recovery. This slow demand environment is expected to continue for another couple of quarters and may see an uptick if the government provides strong fiscal stimulus in the upcoming Budget.
How is the risk-benefit stacked up at this juncture for investors into mid and small-cap equity funds? What’s your advice for investors?
The near-term looks a bit challenging in the small and mid-cap category and we could see some volatility ahead as we get into the 3QFY17 results season. However, we would consider the same to be a good opportunity for long-term investors. We continue to have firm faith in the ability of the small and mid-cap companies to outperform the large-cap index over the long term, and investors may look at increasing their allocation into the same during this volatile period.
Can mid and small cap funds repeat the high returns they managed in the past five years? What is the reasonable return expectation investors could have from these funds?
We cannot speak about future returns but, as mentioned earlier, we continue to have confidence in our small and mid-cap portfolio of companies. We see them growing much larger in size and scale over the next 3-4 years and hence possess potential to outperform the benchmark.
Any sectors you are overweight on?
Due to our optimism on the consumption theme in the longer term, we are positive on the consumer discretionary space.
What should be the typical investment horizon for investors?
Investors with a long term view may continue with their investment. I strongly feel that if we see some correction in the near term due to demonetisation-related slowdown, investors may use that as an opportunity to invest into this category with a 3-5 year time horizon.