Market entering volatile phase; mid and small-cap stocks could see consolidation, says Hemang Kapasi of Sanctum Wealth

In an interview with MintGenie, Hemang Kapasi, Head of Equities, Sanctum Wealth, said that there seems to be fatigue in heavyweight sectors but it is being made up by good performance in low-weight sectors. He further added that we are entering a volatile phase and advised investors to not get carried away by the euphoria in certain pockets of the market.

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What trends should one look out for, for the remainder of 2023?

There is still a significant impetus for infrastructure building in several verticals, especially railways, roads, power, defence, and civil utilities. For the first three months of this fiscal, central government capex surged by 60 percent YoY to ₹2.8 lakh crore. Sustained infrastructure investments shall help the capital goods, industrials, and infrastructure sectors to continue performing in the coming months.

Auto and auto ancillary sectors shall also continue to see selective traction as a few sub-segments in the industry are performing extremely well and with the upcoming festive season, the momentum is expected to continue. BFSI will also a be good space for stock picking. The credit growth is sustaining at mid-double digits, which is an enabling environment for niche small and midcap lenders to grow well.

We are also positive on healthcare as a theme, which is being supported by improving healthcare infrastructure, improved demand backed by government schemes, higher insurance penetration and improving supply in tier 2 cities.

Do you expect 2023 to be a year of muted returns?

The Nifty has clocked a decent return in the year so far. However, there seems to be fatigue in heavyweight sectors like oil & gas and BFSI, and a lack of tailwinds in IT, which is being made up by good performance in low-weight sectors like auto and healthcare. The returns, however, now look front-ended given the superlative profit growth in the last quarter which was led by margin expansion rather than topline growth.

We are entering a volatile phase and current momentum in the market could derail due to a deficit in monsoon which could further impact the demand recovery in the second half of the year and because of multiple state elections being lined up towards the last couple of months in 2023.

Did the markets run ahead of fundamentals in the last couple of months?

A lot of cash went out of the markets fearing bad macro conditions in 2022 after the rates were hiked in a compressed time. As the markets adjusted to high rates and the worst did not play out, the money started coming back into the risk assets not only in India but worldwide. With the rally, the markets have reverted to the mean, but have not gone way beyond the mean to the other extreme. Therefore, the markets may be a little ahead of fundamentals but that’s not concerning.

Are valuations a major risk for the Indian markets right now?

It’s worth noting that Nifty earnings grew at a 22 percent CAGR over FY20-FY23, while the index peaked in October 2021 and slid 18 percent to its June 2022 bottom. The non-movement in prices and increase in earnings had led to a significant moderation in valuations.

With the upmove in the past few months, the valuations have reverted to the mean. The mean itself, in India’s case, has moved up due to the long-term attractiveness of the country. NSE500’s current trailing PE is at 24x compared to the 10-year average of 25.7x. As the valuations hovering near the long-term average, it doesn’t seem to be a major risk for the markets.

Do you see mid and small-cap stocks consolidating going ahead? Will they continue to outperform largecaps this year?

Given the significant run-up in the last 5 months, some consolidation in the mid and smallcaps can’t be ruled out. However, the consolidation may not be a decisive reversal of the trend and would probably be a short-term breather, in which the index will not give much back while time correcting for the fundamentals to catch up.

Smallcap and midcaps always outperform in risk-on rallies. On the flip side, they also give back more in bad times. In the absence of any major macro shock, the outperformance in the segment shall continue this year.

What does your model portfolio look like currently?

Currently, our model portfolio is fairly diversified with the highest weight in financials, followed by industrial and manufacturing, consumer discretionary, and IT. We were very positive on our top two themes in the previous year, and we continue to be positive now as well. However, as the low-hanging fruits are gone with the rally, we are trimming some positions to rebalance the portfolio and get into newer themes. We also deliberately kept our IT exposure low as valuations became a constraint a couple of years ago. We are now gradually building up investment positions in select real estate and chemical names, where we feel there is value and a structural multi-year theme is also playing out.

With so many IPOs launching, is this the right time for retail investors to grab them?

IPOs should always be evaluated on a case-by-case basis rather than taking a blanket approach of putting in applications for every IPO that comes along. Most IPOs leave too little on the table for the retail investors and therefore should be looked at with a big magnifying glass.

What are your sector preferences for this year and why?

We continue to be positive on financials and manufacturing, however, stock picking is getting increasingly difficult in the space because of rising valuations. From a longer-term perspective, we believe specialty chemicals is an investable area given the country’s rising know-how in the space, build-up in capacities, and tremendous import substitution and export opportunities available in the space.

Healthcare is another space that holds promise given the rising affordability due to government schemes and improved insurance coverage. Supply of good hospital beds, which was earlier limited to select metros is now reaching tier 2 towns, which are proving to be more profitable than metro cities-based hospitals.

One piece of advice for new investors?

It’s easy to get carried away by euphoria when you are new to the markets. We are seeing that euphoria in certain pockets of the market where the valuations have become excessive, and fundamentals are yet to catch up in a meaningful way. Therefore, when you set out to invest, look at the merits of individual opportunities and seek a margin of safety in whatever you pick.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.