Equity markets have continued to rally in 2024. The midcap and smallcap indices have surged around 13 per cent and 10 per cent respectively. Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India), says markets at an aggregate level are still not expensive, barring a few pockets. But, rather than a lump sum, he feels investors should look at a three to five-year perspective and stagger their investments. In an interview with THE WEEK, Surana also shared his views on sectors that are reasonably valued, what should one do with small and midcaps and where are interest rates headed.
Equity markets have continued to rally this year and hit record highs. But, we have also seen that rally interrupted by sharp falls like on May 3. Is the rally going to continue? Will we see more volatility? What are your thoughts?
One day movement, no one can testify, predict and extrapolate. And if you see, in the medium term, from October 2021 to March 2023, there was a bit of consolidation. From March 2023, the markets moved significantly up, more than the earnings growth, and they covered up for that consolidation phase.
At an aggregate level, I don't think markets are expensive. There are pockets where valuations are expensive and there are pockets, which are reasonable or cheap. When the market has moved so fast, there should be some consolidation, and consolidation can be for a few months, a few quarters and sometimes slightly longer also.
And to put things in perspective, the Indian market is the only market in the last seven years where every calendar year the markets have closed in green, including the Covid year. There can always be some consolidation, but the overall construct remains positive. And the reason for that is, first, on a relative and absolute basis Indian economy is among the fastest. Second, the worst of the interest rates cycle or tightening globally is over. Third is the earnings trajectory. The big correction or mean reversion has taken place. Still, from here, 13-14 per cent trajectory will be there for the larger, broader indices. And the valuation in that context, at 17-18 times for Nifty is not very expensive.
We are saying three things. Keep a three to five-year view at current levels, stagger the investment, there is no tearing hurry to put lump sum and lastly, keep expectations to low-teens. Basically continue with the discipline of SIP (systematic investment plan) allocation.
So market valuations are still reasonable at this point...
There are three pockets I will call out, which are reasonable. One is, a couple of large private banks are reasonable. They are unique but they are large. There are certain factors where the near-term earnings are impaired, but the long-term is intact, but that's one pocket. The second pocket, where again near-term earnings are impaired, longer term is solid is mass consumption. The third segment, which we like is, pharmaceuticals within that manufacturing companies, the CDMO (contract development and manufacturing organisation) companies or even some segments of specialty chemicals. Again, this segment has corrected in terms of earnings. So, I think these three segments are looking reasonable.
There are some segments where one has to be slightly careful, which is essentially in the industrials, infrastructure, some government companies, some SMEs (small and medium enterprises).
The other large sector is IT services. What is your outlook there?
Globally, all of us know that there is soft growth, particularly US and Europe. They have seen that interest rate shock happening. So the macros have had an impact on IT services. Then, IT services got rerated post-Covid. So the base was also not very favorable.
Today, when I look at P/E multiple of IT companies, compared to the calendar year 2015-2020, that is pre-Covid five-year average, it is not very cheap. And the confidence in growth in the near term is missing. At the same time, these companies now have a differentiated capital allocation, higher dividends, stock buyback and stuff like that. So, net-net our view is that near term one has to watch the trends in terms of turnaround. They are in that reasonable zone. But to trigger and make it overweight, one has to get more confidence on the macro turnaround.
Talking of valuations, what is your view on the midcap and smallcap space, given the run-up we have had there?
The number of stocks there, which are expensive, are higher. But the denominator is also very large. If the large caps are 100, the mid and small caps put together is another 400. Even if 75 per cent of that is not very cheap or comforting, 25 per cent of 400 is still 100 stocks.
A big change, which has happened in the last 4-5 years is that the market size breadth, the opportunities have increased. Because of the classification, there are many businesses that are there only in mid and small-cap. They are not getting reflected in the large-cap. Let's take the example of AMC (asset management companies) business, they are not there in the benchmark large cap index. If you look at a hospital business, there is only one company in large cap and almost a dozen in mid and small caps.
I gave examples of CDMO or mass consumption in which home improvement is there like tiles, plyboards, and mass-retail. There are multiple things in small cap, they are not very expensive. But yes, from an overall perspective, I would say that large allocation today should be in large caps. But, from a very longer-term perspective, the importance of mid and small cap has increased. Otherwise, you don't get enough opportunities to invest across businesses. So products like multicap fund or flexicap fund make it much more interesting today than they were four or five years back.
Last week, the Federal Reserve signalled it is in no hurry to cut interest rates. The RBI too has been on hold for some time now. As a fund house, what is your view on interest rates this year?
This year it is getting pushed. But, its also a slightly complex subject. Because the level of debt in the US is so high, if you maintain the current level of interest rates, it will really hurt their economy. From a two-year perspective, the glide path is heading 200 basis points lower, if not more. This year it is so much data dependent like (US) labour market has to soften etc.
In India, again, it will come down, but first, there is a room to look at tools to ease liquidity and then look at repo rate. One year down the line, I will not say there will be significant correction, but it can be lowered by 25-50 basis points. It may or may not happen this year as it is linked to the Fed, it is linked to many other things.
