Five segments which display micro-bubbles and three segments that look attractive

There are around five distinct areas in the market that are exhibiting bubble-like tendencies, Vinay Paharia, CIO, PGIM India Mutual Fund, in an exclusive interaction with Moneycontrol. At PGIM, Paharia has been overseeing equities and fixed income businesses since 2023 and manages PGIM India Small Cap Fund, PGIM India Large Cap Fund, PGIM India Flexi Cap Fund, PGIM India Midcap Opportunities Fund and PGIM India ELSS Tax Saver Fund. With over 20 years of experience, he has previously been the CIO for Union Asset Management and Senior Fund Manager – Equity at Invesco Asset Management (India).

While they have advised investors to stay cautious about these segments, he adds that these bubbles collectively represent only 20 to 25 percent of the overall market. Roughly two-thirds to three-fourths of the market is still not in a frothy zone and it is good to remain invested there, he said.

Edited excerpts:

Do you think markets are frothy and racing ahead of fundamentals?

No. Roughly two-thirds to three-fourths of the market is still not in a frothy zone. And it is good to remain invested there. But we've been observing some distinct areas in the market that are exhibiting bubble-like tendencies. First, there's a bubble forming in low-quality mid and small-cap stocks, characterised by low return on equity (ROE) and stagnant growth. Second, is recently listed companies. Third, is in certain public sector units. Fourth, we're seeing inflated valuations in the industrial and capital goods sector, where stock prices have surged ahead of underlying earnings growth. Fifth, is the real estate sector, particularly residential real estate companies. But these bubbles collectively represent only 20 to 25 percent of the overall market.

Which market segments are you bullish on?

We favour sectors with high-quality, more than average companies, such as healthcare where we like domestic formulations and hospitals; financials where we prefer private sector banks and high-growth NBFCs; and consumer discretionary including QSRs, auto ancillaries, and OEMs.

Are you worried about the regulatory crackdown on NBFCs lately?

Regulatory actions targeting sectors exploiting loopholes or exhibiting poor management quality reaffirm our focus on high-quality spaces. Thus, our preference currently lies with private sector banks due to their stability and regulatory compliance. Staying invested in sectors benefiting from regulatory measures ensures a conducive environment for growth and stability.

Why are you bullish on QSRs despite the recent performance of the segment?

Despite recent challenges in the QSR space, we see long-term growth potential driven by India's economic expansion and rising middle-class consumption. Valuations have become attractive due to recent underperformance, offering an opportunity for future appreciation. QSRs possess strong consumer moats and high returns on equity, making them compelling investments as demand for discretionary products surges.

Do you foresee a market shift away from small and mid-cap segments?

We anticipate a gradual market shift towards high-quality, high-growth companies over the next one to three years, away from weaker quality, low-growth names. While the rally in small and mid-caps may continue, some level of caution is warranted due to concerns about underlying market dynamics.

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