scorecardresearchGrowth prospects in mid, smallcap space exciting, says Satish Ramanathan

Growth prospects in mid, smallcap space exciting, says Satish Ramanathan of JM Financial Asset Management

Updated: 23 Aug 2022, 09:09 AM IST
TL;DR.

  • While corporate health and performance has been good, Indian market valuations are still higher than peers, thereby limiting the upside to our markets, says Ramanathan.

Satish Ramanathan is CIO - Equity, JM Financial Asset Management.

Satish Ramanathan is CIO - Equity, JM Financial Asset Management.

India is prone to global crosswinds such as the Russia-Ukraine war and China-US standoff. These issues along with inflation, will dominate global money flows, said Satish Ramanathan, CIO - Equity, JM Financial Asset Management, in an interview with MintGenie. He said with inflation pushing central banks to raise rates, expansion of equity valuations will be difficult.

Edited excerpts:

What is your view on the current market? Is it a bear market rally because the concerns have not faded away?

We have rallied nearly 20% from the last week of June. This period was also marked by a reversal of flows by the FPIs who resumed buying after selling Indian equity after 9 months. Higher cash levels with domestic mutual funds would have contributed to the speed of this upmove. 

It is difficult to say whether this is a bear market rally. While corporate health and performance have been good, Indian market valuations are still higher than peers, thereby limiting the upside to our markets. 

A structural bear market is usually caused owing to excesses in borrowing/investing by a particular segment (individuals, government or corporates) requiring a balance sheet repair over several years. In the case of Indian corporates, we do not seem to have an excess in capacity or leverage to impact performance. 

However, India is prone to global crosswinds such as the Russia-Ukraine war and China-US standoff. These issues along with inflation will dominate global money flows.

Just a few months ago, many analysts were of the view that the Nifty may give either a flat or negative return this year. What has changed now? What are your expectations from Nifty?

We have seen significant volatility owing to steep valuations and central bank rate actions. With inflation pushing central banks to raise rates, expansion of equity valuations will be difficult. While corporate performance is expected to be strong, valuations leave little room for further upside unless there is a sharp decline in inflationary pressures.

What are the best themes to bet on in this market and what are the areas where one should be cautious?

We believe that India is poised to benefit from the China+1 theme, as also an improvement from the domestic manufacturing and consumption themes. We expect a recovery in demand in the auto sector given the improvement in semiconductor availability. Agriculture has also seen an improvement on the back of good monsoons, though the sharp rise in input costs has impacted fiscal deficits. Given the global volatility, we believe a diversified portfolio comprising of bottom-up stock picks would be the best way to invest in the current environment, rather than focus on a few sectors alone.

What is your view on small & midcap space from a 1-2 year perspective?

We are excited by growth prospects in the midcap and smallcap space, and believe that this is a structural phenomenon with a long runway ahead. This segment will continue to see the benefits of new companies entering through the IPO process, as also higher growth themes such as fast foods & beverages, formalisation, digitisation, financialisation and even exports. There are companies in the midcap space that have leadership positions in niche businesses that are difficult to replicate. A good mix of midcaps and largecaps through a flexicap portfolio is a good way to invest for the medium term.

Why have stocks of new-age tech companies not been able to meet expectations? Would you recommend betting on stocks such as Zomato and Paytm?

There are many reasons that new age companies have not met expectations, but primarily valuations were very rich at the time of their IPOs. Further, many companies are yet to stabilize their business models and establish a path to profitability. We do not comment on specific companies and follow a disciplined approach in evaluating businesses and their valuations. This has helped us completely avoid the manic valuations, which have caused heavy anguish to their investors.

Disclaimer: The views and recommendations are those of the analyst and not of MintGenie.

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First Published: 23 Aug 2022, 09:09 AM IST