Small and midcap outperformance set to reverse?
Motilal Oswal Private Wealth's Nitin Shanbhag and Sandipan Roy share views.
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.
08:02Thank you.
08:03Thank you.
08:03Thank you.
08:04Thank you.
08:05Thank you.
08:05Thank you.
08:06Thank you.
08:06Thank you.
08:07Thank you.
08:07Thank you.