It’s worth noting that the price-to-book valuation discount of the midcap and smallcap Indices compared to largecap indices, have significantly narrowed, he said.
“Given the current scenario, it appears that the risk-reward balance might be more favorable for larger mid-caps and large-caps,” Patel said in an interview with ETMarkets. Edited excerpts:
After the 4 months of the rally, do you think the equity market is overheating or you see more legs to this rally?
Equity markets often defy expectations, catching investors off guard, especially during times of strong consensus. The last four months have seen an unexpected 14% rebound, contrary to expectations of a flat or negative return in 2023.
Rather than attempting to predict short-term market movements, a more valuable approach involves analysing risk-reward dynamics from multiple perspectives.
Presently, the BSE Sensex trades at a price-to-book ratio of 3.5x, which is a 13% premium to its 20-year historical average.
However, encouraging domestic macroeconomic conditions have surpassed expectations, partially offsetting concerns about premium valuations, and providing investors with a sense of reassurance.
So, India’s fundamental outlook appears reasonable from a medium-term perspective.
The broader market (mid and small caps) have outperformed benchmarks by a wide margin. Do you see this outperformance continuing?
The impressive performance of the smallcap and midcap indices can be largely credited to strong inflows in small-cap and midcap mutual funds, propelling their upward trajectory. It’s worth noting that the price-to-book valuation discount of these indices compared to largecap indices has significantly narrowed.
In fact, some smallcaps have entered into a bubble valuation zone, indicating higher risk. Given the current scenario, it appears that the risk-reward balance might be more favorable for larger mid-caps and large-caps.
As a result, investors should exercise caution and carefully assess the market dynamics before making investment decisions in the smallcap and midcap segments.
Which are the sectors that look promising in terms of growth and returns over the next 2-3 years?
Our outlook on the investment cycle has remained bullish for some time, and this is evident in the robust growth reported by industrial companies in terms of revenues, order bookings, and cash flows.
Additionally, Indian banks are in a favorable position, as credit growth has surprised on the upside, although margins are expected to normalize from peak levels. Nevertheless, we anticipate banks to deliver strong performance over the medium term.
Furthermore, the auto and auto ancillaries industry is experiencing significant traction, with the electric vehicle segment expected to provide a substantial boost in the years ahead.
Our positive outlook extends to inward-looking sectors, which rely on domestic factors, rather than outward-looking sectors, dependent on global factors.
You launched a Flexicap Fund. Could you share the key attributes of your Flexicap fund?
As a fund house, we use a unique Secular-Cyclical-Defensive-Value Traps (SCDV) framework, which enables us to capture ideas across different market segments such as Quality, Growth, and Value.
360 ONE Flexicap Fund follows this SCDV framework, which forms the basis of our strategy. It is an open-ended dynamic equity scheme investing across large-cap, mid-cap and small-cap stocks.
What’s your strategy for portfolio diversification?
We believe that better diversification can be achieved by having exposure across different segments of the market rather than by just increasing the number of stocks in the portfolio. Market segments go through cyclical performance patterns.
Our distinctive framework SCDV allows us to identify opportunities in various market segments and we aim to achieve a balanced mix of these segments in our portfolios.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)