asset allocation: ETMarkets Smart Talk: Think again if you plan to increase exposure towards small & midcaps in 2024

“It may be wise to re-evaluate investments in the small & midcap space and consider shifting focus towards largecap stocks, which have the potential to deliver a stronger performance in the coming year,” Rajeev Mathur, Head – Wealth Broking, YES SECURITIES India Ltd.

In an interview with ETMarkets, Mathur said: “It is important to note that the recent surge in mid and small-cap stocks may have led to inflated valuations, without corresponding improvements in earnings,” Edited excerpts:

Small & midcaps outshine large caps in 2023 – should one look at booking profits in the broader market portfolio and placing bets on largecaps from an MF perspective?
Given the current market scenario, where mid-cap and small-cap stocks have been outperforming large-cap stocks, it may be prudent to consider booking profits in the broader market portfolio and placing bets on large-cap stocks from a mutual fund perspective.The year-to-date returns for mid-cap and small-cap indices have been significantly higher than the Nifty 50, indicating their strong performance.

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However, it is important to note that the recent surge in mid and small-cap stocks may have led to inflated valuations, without corresponding improvements in earnings.

While the correction in these segments may suggest a decline in frothiness, it has not significantly impacted valuations for many stocks.

As most mid and smallcap stocks lack value, as they have witnessed significant re-rating in multiples without a strong underlying business model or competitive advantage.

Therefore, it may be wise to re-evaluate investments in this space and consider shifting focus towards large-cap stocks, which have the potential to deliver stronger performance in the coming year.

What are the requests that you are getting from your clients when it comes to managing wealth – are they open in taking more risks compared to the past and exploring new products?
The wealth management industry in India is evolving rapidly, driven by technological advancements, increasing sophistication of investors, and the availability of new financial products

Indian clients are increasingly open to taking more risks and exploring new products.The decreasing age of the wealthy also adds an element of risk-taking to the wealth management space because, being in their prime, these individuals are willing to take on greater risk in the pursuit of higher returns, something which wasn’t the case just a decade or so earlier.

The changing face of the wealth management industry in India is characterized by a shift from traditional “plain vanilla” wealth management to more personalized and digitally savvy services.

Wealth management firms today must focus on building and owning the trust of their clients, and this can only be facilitated by providing a 360-degree view

Wealth creation and risk planning go hand in hand, and while risks can never be eliminated, they can be minimized through effective risk management.

Essentially clients are open to well-diversified structured products that give them exposure to various asset classes and are essentially looking for steady returns with tailor-made products.

What about international investing? How will that grow in 2024?
In 2024, international investing may face a complex landscape characterized by a fragmented economic outlook and heightened volatility.

As global growth decelerates, particularly in developed economies with a projected mild recession in the US during H1, investors must carefully navigate shifting dynamics.

The anticipated five-year-high growth differential between Emerging and Developed Markets underscores the need for a discerning approach, with a focus on regions exhibiting resilience, such as India poised to outpace China.

A forthcoming reversal in monetary policy, including Fed rate cuts in H1, signals changing global interest rate dynamics, influencing asset valuations.

Moreover, fiscal policy shifts in Developed Markets, steering away from support due to high debt and towards energy transition initiatives, necessitate a strategic response from investors.

The recommendation to concentrate on sovereign debt, quality credit, and hard currency emerging market debt at the year’s outset aligns with the evolving economic landscape.

The Fed’s pivot supporting risk assets implies potential benefits for investors in Asian equities. In this context, a diversified and informed international investment strategy, responsive to geopolitical and economic changes, will be crucial for capitalizing on opportunities and mitigating risks in the intricate global financial landscape of 2024.

SIPs have been hitting fresh highs every month. What does this talk about the culture of retail investors which has also resulted in the launch of new NFOs? But, it does look like investors are open to taking risks.
The surge in Systematic Investment Plans (SIPs) to a record Rs 16,928 crore in October underscores a robust and committed retail investor culture in India.

This monthly uptrend, contributing to the 32nd consecutive month of net inflow in equity mutual funds, reflects investor confidence in the country’s growth story and a growing willingness to embrace risk.

The substantial increase in mutual funds’ collection through new fund offerings (NFOs), reaching Rs 22,000 crore in the July-September period with the launch of 48 schemes, indicates an active pursuit of new investment opportunities.

This heightened interest in NFOs aligns with positive market sentiments, showcasing retail investors’ openness to taking risks and contributing to a proactive approach in the equity market.

What are the new trends that you are seeing in the wealth management industry?
The wealth management landscape is undergoing significant transformations driven by key innovations and trends.

Emphasizing wealth creation, custom investment strategies, digitalization, succession planning, and access to alternative assets, the industry is evolving towards deeper client engagement while prioritizing conflict-free relationships with wealth managers.

Anticipated developments include a robust wealth creation engine, expanding beyond metropolitan areas for growth opportunities, and a shift from awareness to engagement in client interactions.

Digitalization and the integration of artificial intelligence/machine learning aim to enhance client experiences and operational efficiency.

Succession planning gains prominence, especially with the involvement of second and third-generation global citizens in safeguarding family wealth.

Additionally, there is a growing interest in alternative asset classes like venture capital and private credit, while deeper listed markets and nuanced investment strategies are emerging.

Staying abreast of these trends is crucial for wealth managers and investment specialists to remain competitive and safeguard their clients’ wealth in this evolving landscape.

With US Treasuries quoting at 5% do you think it makes sense to allocate more towards FD or guaranteed products in 2024?
Amidst recent developments in the US bond market, notably the surge in the 10-year US government bond yield to 5% in October 2023, there’s a heightened interest in revisiting investment strategies.

The fluctuating interest rate spread between Indian and US government bonds, reaching a decade low of around 250 basis points, adds complexity to decision-making.

Recognizing the dynamic nature of financial markets, influenced by factors like Federal Reserve commentary and inflation trends, is essential.

Anticipating a decline in yields and a potential rally in quality bonds in 2024, a nuanced approach to portfolio allocation is crucial.

Diversification emerges as a key consideration, advocating for a balanced exposure to both fixed deposits (FDs) or guaranteed products and US Treasuries.

This strategy enables effective risk management in the face of market uncertainties, allowing investors to navigate fluctuations and capitalize on opportunities presented by varying bond market conditions.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)


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