'Stay invested! Demand for mid and small caps is likely to improve in 2020'

The demand for mid and smallcaps is likely to improve on the back of better corporate earnings, cheap valuations and the large inflows seen from domestic investors, Pankaj Bobade, Head- Fundamental Research, Axis Securities, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) Markets seem to be inching higher at a time when inflation is high, IIP data is contracting and on the global front, Coronavirus is making investors edgy. What is fuelling the upside?

A) Though the concerns regarding Coronavirus are still valid, markets are driven by the good quarterly earnings along with the positive sentiment following the liquidity infused by the global central banks which is fuelling the risk appetite in the global equity markets.

So far the earnings reported have been better than expectations of the market participation. Markets always discount the future and are looking forward to improving corporate earnings in FY21 and FY22 in the backdrop of flat earnings growth over the last couple of years.

Monsoon 2019 was an extended one leading to ample water content in the earth and the reservoirs thus making it good for the Rabi crop which has seen record sowings and hence expected to yield a robust crop.

ENSO conditions are ‘neutral’ so far indicating normal monsoon paving way for a good Kharif crop which would further support demand-led recovery in the economy. The markets are thus driven by the feel-good factor of economic recovery in backdrop deceleration seen over the last one and half years.

Q) Do you think Budget 2020 had enough firepower to push the economy towards 6% in FY21?

A) Budget 2020 along with the RBI policy has put sufficient measures to ensure that the deceleration of the economy is arrested. Moreover, the government is vigilant enough and other measures can be put in force outside the budget too.

The green shoots are visible in the form of improving GST collections, improving corporate earnings, rising net portfolio investments by FPIs in India, bottoming out process seen in industrial activities evident from expanding PMI, etc.

The government has taken the right steps to make funding available for the NBFCs which have started lending thus oiling the much-needed financing machinery in the credit markets which would in turn push for economic recovery.

Continuous availability of funds for NBFCs coupled with low cost of funding would happen to be the fulcrum of economic recovery. The Budget 2020 has been good for India Inc. though the few expectations of market participants were not met.

The corporate tax cuts taken in September’19 would encourage capital investments and entice global supply chains to look out for India as an alternative for China; the coronavirus outbreak will only hasten the shifting process.

Budget 2020 has endeavoured for simplification of the tax system, enabling sovereign funds to make investments in infra projects, push towards import substitution by supporting local manufacturing especially in sectors where the incremental demand is likely to shift.

Demand-led consumption along with capital investments would drive the economy from the current five-year lows towards higher single digit in years to come.

Q) Coronavirus concerns - if the situation escalates further, do you think it will have an impact on the Indian economy?

A) The potential of disruption due to Coronavirus impact cannot be brushed away given the disproportionate dependence of supply chain in industries like chemicals, pharma, consumer electronics, etc. on China.

Similarly, the weak demand in commodities especially metals would impact the pricing as China is the second-largest economy, is the largest producer and consumer of commodities.

Weak demand and pricing in the sectors where China is a key demand driver would impact global growth. Overall, the spread of Coronavirus is a risk from a market point of view.

Q) Small & midcap schemes have also attracted a large sum of money from mutual funds. Do you think the lull in small & midcaps is over?

A) The valuation gap between large-caps and mid & small-caps has been narrowing. The demand for mid and small caps is likely to improve on the back of improved corporate earnings, cheap valuations and the large inflows seen from domestic investors.

The recent targeted measures taken by RBI would relieve stress on housing, auto and retail loans enabling improvement in demand for these sectors; overall, the interest rates are expected to be soft in near future, which would be beneficial for all the companies across the economy.

Enabling efforts have been taken to make available low-cost funds for NBFCs which would oil the economic engine stalled so far thus pushing the much-required credit growth.

Mid and small-cap companies would be benefitting from the availability of low-cost credit and improving credit culture. Ample liquidity would also help improve the investors’ sentiment thus creating a conducive environment for investments in the mid and small-cap sectors.

Similarly, the demand for mid-caps on expectations of widening of definition for mid and large caps by SEBI is also likely to benefit these stocks.

Q) Since Valentine’s Day just went by – when did your love with capital markets begin?

A) I was pretty late in recognizing the power of equity for creating wealth. Hailing from an engineering background, I started investing way back in 2002 from the savings in my regular job.

Initially, it started with speculation, but later I realized that long term benefits of investing in fundamentally sound companies which involves identifying right stock using either top-down or bottom-up approach, undertaking detailed due-diligence about the concerned stock and having patience by keeping invested in the stock would create real wealth coupled with peace of mind.

One should understand that the first two steps account for just 20% of the efforts but the last one viz., patience in holding the stock throughout the investment process involves the real test of the investor.

While remaining invested in the stock the investor has to battle the short term volatility of the stock along with the general market, the underperformance of the stock, if any vis-à-vis general markets, the lure of investing into other stocks where fellow investors are invested, etc.

If one has done through due-diligence into fundamentally strong stocks and has conviction in the investment story, he would be rewarded over the long-term.

Though they say that one should not marry the stocks, having done thoroughly due-diligence one has to have faith in the investment they made, and give ample time for the management to deliver on the expectations to create wealth over the long term.

Having understood this, it is a long road ahead given the potential of creating wealth in Indian equity markets as the Indian economy is poised to double over the next decade.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Exclusive offer: Use code "BUDGET2020" and get Moneycontrol Pro's Subscription for as little as Rs 333/- for the first year.