Daily Voice: Saurabh Rungta of Avendus still advises caution on mid, smallcaps. Here's why

Avendus Wealth Management managing director and chief investment officer Saurabh Rungta thinks the correction in mid and smallcaps though healthy isn’t done yet.

Some more correction might be on the way and it would be best for investors to stay cautious, Rungta, who has over two decades of experience in both Indian and global markets, said.

He is, however, bullish on PSUs. The sector had been undervalued but is quickly catching up, Rungta tells Moneycontrol in an interview. Edited excerpts:

Do you think valuations are compelling enough in mid and smallcaps, especially after recent bloodbath?

I would not call it a bloodbath exactly. Yes, there has been some correction but it’s a healthy one. Indices are down 4-5 percent and stocks are down 15-20 percent and some of this was expected. Some more correction might be on the way, so it’s best for investors stay cautious when investing in mid and small caps.

Which are the sectors or themes in demand from high networth individual (HNIs) and ultra HNIs?

Sector demand is cyclical in nature — every sector has a heating and cooling off period. Even in terms of new age sectors or themes, we are seeing a cooling off in demand right now versus what it was a few years ago.

In terms of products, the flavour is shifting for UHNIs and family offices from doing private equity AIFs (alternate investment funds) to getting into direct deals themselves. So, while the underlying flavour is there, we are seeing a slowdown for funds and AIFs but it’s temporary and it will come back very soon. So demand will keep yo-yoing as is the nature of these things.

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Do you think PSU is the larger value theme to bet on?

PSUs is a very good theme and we should continue to bet on it. It was highly undervalued three-five years back but has seen significant catch-up since. Today, PSU stocks are largely fairly valued or a shade under-valued but we have a 10 years history of PSUs being in deep value, so most people are in denial of the current multiples at which PSUs are trading.

But if you compare these multiples to those of the private players, then they are still at a discount and there is room for a bit more of an upside. If government policies continue the way they have been for the last 10 years, then all bets are on the table for PSUs to catch up with private multiples.

Also read: Investment strategist lists four factors likely to drive markets in next financial year

Do you see the possibility of more than a 10 percent correction in the current calendar year? Which are factors that can create panic?

Markets can throw us a surprise every day and it is next to impossible to predict. Yes, it can easily correct up to 10 percent, creating an opportunity for investors with undeployed capital. There is huge liquidity in the market but the past has shown that once correction starts to take place, greed kicks in and investors want to wait for more correction to happen.

From a factors standpoint, there are several domestic and international ones at play, with the geo-political theme being the biggest influencer. Others include oil prices, any negative surprise on Lok Sabha elections, monsoons and US elections. Today, the market has already factored in effects of multiple interest rate cuts but any slowdown there will affect us too.

Any dark horses that should be keenly watched for coming years?

Pharma is one dark horse that we need to watch out for. Others are infrastructure, industrials, engineering & capital goods. Every sector has dark horses where companies are doing well but are not fairly valued. If I had to pick some sectors then these, along with consumer and retail, is what I would keep an eye out for.

Do you see any risk to corporate earnings for the next financial year?

It depends on your expectations; if corporate earnings growth expectations is in the range of 14-16 percent then it’s fine and you should see little risk, but if expectations are around 20-25 percent growth for the year, then there could be a surprise on the downside. So, reasonable growth can be expected provided a black swan event doesn’t emerge in the horizon.

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