Small & Midcap Outperformance To Reverse? | NDTV Profit - video Dailymotion

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Small and midcap outperformance set to reverse?   Motilal Oswal Private Wealth's Nitin Shanbhag and Sandipan Roy share views.

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00:00Let's get in Sandeep and Roy, Chief Investment Officer,

00:02Motilal Hossal Private Wealth, and Nitin Shanbagh,

00:04Head, Innocent Products at Motilal Hossal Private Wealth

00:06to talk about this.

00:07Gentlemen, both of you, thanks for joining in.

00:10Interesting that you observe what a few people have spoken

00:13about, but with adequate numbers, gentlemen,

00:17about how the quarter was, particularly

00:20on the breadth and the nature of the stocks that have moved.

00:24What were the key insights here?

00:26Either of you can start.

00:29So maybe I'll go, you know, if you

00:31look at the way the year has spanned out, fiscal year 2024,

00:35and if we take the top 500 stocks, which

00:37is the Nifty 500 universe, we find

00:40that almost 90% of this universe was delivering positive returns

00:45in the first quarter, which is between April to June 2023.

00:49And by the time we got to Jan, February, March,

00:53we had only 50% of the stock universe, which was actually

00:56delivering positive returns, right?

00:58As we tapered off towards the end of the year,

01:01we found that it was predominantly

01:03the large cap universe, which continued

01:05to do well in terms of positive returns,

01:10whereas a whole host of stocks, almost 60% to 70%

01:15of the universe within mid cap and small caps

01:18started generating negative returns.

01:20So that was one insight that we took

01:22in terms of the breadth of the rally, right?

01:26The second insight was the performance of these market

01:29caps throughout the year.

01:31So if you look at fiscal year 2024,

01:34the markets kind of topped out around end of January,

01:40early February 2024.

01:42And during that time period, obviously,

01:44mid and small caps did extremely well.

01:47And perhaps half that universe actually

01:50gave more than 50% return.

01:5220% of that universe actually doubled.

01:55But when we look at the last two months, which

01:57is February and March, again, we find a similar story

02:02where 70% of the large cap universe was actually positive.

02:08But about 2 thirds of the mid and small cap universe

02:11actually gave negative returns.

02:12In fact, 20% of that universe actually fell more than 15%.

02:17So these are the two predominant areas

02:19in which we saw a shift in tides.

02:22And that's why we even titled it that way.

02:24Yeah, no, so.

02:26Yeah, please carry on.

02:27Yeah, no, so what we have been talking

02:31about from the beginning of the year

02:33has been that mid and small cap is

02:35where we are seeing some bit of froth building up.

02:39And hence, staggering investments

02:41is what we had been recommending,

02:43not knowing that there will be some regulatory interventions

02:46also, apart from the market fatigue that naturally builds

02:49up, while large cap is where we had been saying that you

02:52should go into a lump sum.

02:54And that has been kind of vindicated.

02:57I'll bet it's a short-term period.

02:58But the thing is that we remain structurally

03:01bullish on the markets.

03:02The earnings growth will drive the markets.

03:05But yes, some bit of focus has to come back

03:10on picking up stocks as the breadth is really narrowing.

03:14I wonder, though, I mean, when I look at page number

03:1710 of your presentation, you guys

03:20talk about the valuations relative to forwards.

03:23And yes, the mid-cap PE relative to the Nifty PE 10-year

03:28averages as well substantially at a premium,

03:31but not so much for the small cap end, right?

03:33So prudent to say that maybe there

03:36could be pain if valuations were to correct at the mid-cap end,

03:40but not necessarily in the small cap universe,

03:42or that's not the correct way to read it?

03:46See, in many ways, small caps is also a function of liquidity.

03:49And given the low float that is available

03:53within the market, valuations there

03:55matter quite a lot more than they

03:58would in the mid-cap side.

04:01For many reasons, the mid-cap stocks

04:03have also not corrected as much because it's

04:05a defined universe of 150 stocks as

04:07part of the semi-categorization.

04:09The small cap is a fairly broad universe.

04:12So rather than looking at the index per se,

04:15what we are trying to say is that it

04:17would be best to focus on quality names.

04:19And hence, a mid and small caps from an investment

04:22perspective now onwards needs to be far more bottom up

04:26in nature.

04:26And we are saying that for select strategies,

04:29both in mid-cap as well as small cap,

04:32given where we stand currently in terms of valuations,

04:34it would be preferable to stagger your investments out

04:37over a period of the next 6 to 12 months.

04:40Also, in small cap index, I think

04:42it is not fully correct to look at the EPS earnings

04:47of the index.

04:48You will notice that even in the graphs that we have shown,

04:51there are spikes both on the upside and on the downside

04:54when the index constituents get changed

04:57or there are earnings revisions on a back-ended basis

05:00that happen.

05:01So not always the earnings on the index

05:04gives a correct indication.

05:06And hence, we need to look at stock-wise and not

05:10just on the index.

05:12Large caps, again, as we have emphasized on,

05:16the valuations are actually lower than in the last 10 years

05:20average.

05:21And the earnings growths have been quite positive

05:25and we are quite optimistic on the earnings growth.

05:27So the peg ratios, which is something

05:29that we have been tracking very closely,

05:31that remains very attractive for the large caps.

05:35OK.

05:36OK.

05:37Fair point, too.

05:38Just one final question, and that

05:41is around the sector rotation.

05:44Now, is this, to your mind, something

05:46that will always happen in a cycle

05:48wherein at some point of time when the cycle has

05:50run its course, there will be a shift of hats

05:54and the underperformers will start outperforming?

05:56Or are there some specific reasons

05:58why this is happening to some of the sectors this time around?

06:03We believe that sector rotation is always part and parcel

06:06of any market cycle.

06:07In fact, market cycles are actually

06:09starting to get shorter.

06:11And that's purely on account of the dissemination

06:14of information, the efficiency that we

06:16have with the advent of social media channels,

06:19and so on and so forth.

06:20So just to mention that point, over the last fiscal,

06:24some of the sectors which otherwise did not

06:27participate in the early half of the rally

06:29have started to participate in the last quarter,

06:31predominantly your banks and BFCs, auto and health care.

06:35And a couple of sectors which actually

06:38were performing in the initial phase,

06:40like power and infrastructure, have started to lag.

06:44At the same time, two sectors distinctly

06:46have maintained pace.

06:48The first amongst them is real estate.

06:50And Neeraj, you would remember that we've

06:52been fairly constructive on that space for the last six

06:57months to a year.

06:59And the other has been capital goods,

07:00because now we actually see the advent of the capital CAPEX

07:04cycle coming into place.

07:06And it's a long gestation cycle, but these

07:10are two areas where we continue to remain fairly bullish.

07:13At the same time, some of the laggards

07:16have continued to remain laggards.

07:19Banks, per se, have not yet caught up.

07:24So while there should be a catch-up rally at some point

07:27where the entire market rebases, I

07:30think this cycle is all about growth,

07:34be it on the earnings growth, be it on the order book growth.

07:38So given that animal spirits, I think

07:41sectors where we don't see too much of earnings growth

07:44momentum, I think we'll continue

07:46to remain laggards for fundamental and liquid reasons.

07:51Gentlemen, a very small conversation

07:53on what is always a very interesting monthly note.

07:56We'll make amends the next time.

07:58We'll have to wrap it up on this show today, though.

08:00Thanks so much, both of you, for joining in.

08:02Thank you.

08:03Thank you.

08:04Thank you.

08:05Thank you.

08:06Thank you.

08:07Thank you.

Small & Midcap Outperformance To Reverse? | NDTV Profit

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