Typically investors look at stocks that are going to give them high returns over a short period of time and this is typically what the story would have been in midcap stocks but certainly in recent times, the kind of decline that we have seen in the midcap universe over a span of five years, that trend is reversing especially with foreign investors. They have this added interest despite the kind of premium valuations in that universe. Why do you think this is happening?
It is very simple. India is now a growth market. We are coming out of a phase from 2018 to 2022 when the economy was not really growing. Now, with the help of government’s impetus on infrastructure, on manufacturing, the economy is picking up. Today, we have seen Apple’s contract manufacturer Foxconn has started its manufacturing of iPhones in India and this is just the start. A lot of companies across sectors like chemicals, like pharma, like manufacturing per se, like auto manufacturing, all of them are coming to India and slowly and steadily, growth will come to India and that is what the investors are really betting on. Over the next 10 years, India’s time has come to the fore as. With China’s growth slacking, investors are even more betting on India. The growth story of India is here to stay at least for the next 10 to 15 years.
But what you are saying is in general something that you have held on as a view for a long period of time about the Indian markets in general. But why are they preferring midcap stocks over certain A-line counters?
See what really happens is, let us take the example of IT. If a large cap IT will grow at about 10 to 15%, a midcap IT will do a 15 to 25%. So when investors say mid and small cap, they are basically trying to chase faster growth in all of these companies. And as you already know, 75% of India’s population is about 28 years of age.
And as the consumption within the economy continues to keep growing, you will find all of these companies continue to keep benefiting and that is what the story is all about.
Try and bet on small and midcaps and try to capture the growth story. At the same time, valuations are aggressive now at this stage. Therefore, you need to be very careful. Try to bet on very high-quality companies where the business is very, very strong. And still from here on as well, you will find five years down the line, you will say that this was the bottom. And from here on also, all of these companies have made a lot of money.
Tell us about the RBI’s moves in recent times. To be able to tackle inflation, there have been rising interest rates. But of course, that cycle could turn soon. How is that going to impact the course of the midcap universe?
First of all, we need to applaud the RBI. It has been the best central bank across the world in handling the inflation crisis. Now the inflation crisis is at its end, and we will see central banks across the world slash interest rates somewhere in the next year. As the interest rates continue to keep moving down, maybe the RBI will also start cutting rates somewhere in June. Near term, we have headwinds in terms of vegetable prices moving up. But I think over the next three to four months that will also ease off. So the RBI will start to cut interest rates somewhere in the latter half of next year and that should also help the equity markets per se. But net-net inflation in India is controlled. Interest rates have topped out. And from here on, the RBI will stay here before it decreases interest rates and when it decreases interest rates, it is positive for equities.
Even decoding this current trend, we are not seeing as much domestic participation as much as there is foreign participation or investments in the midcaps. Why do you think that is the case? And are they going to concentrate that much on consumption and cyclical counters?
I will disagree with this fact. Let me give you a data point. A data point is the small-cap SIP is at about Rs 3000 crores. It has been Rs 3000 crores per month, and it has been at its highest over the last 12 to 24 months so people domestically are also trying to flock into the small and the midcaps.
However, mutual funds are trying to restrict the flows because they think that valuations have gone through the roof and it is very difficult to invest money. For example, the Nippon Small Cap Fund has restricted its inflows. The Tata Small Cap Fund has also restricted its inflows. So in my opinion, everybody is trying to flock small and mid-caps.
We are in the boom phase. And in the boom phase, the valuations can go to a euphoric level. So everybody needs to be very careful while investing in these small and midcaps. Be mindful of the valuation and do not think that even though India is a growth story, the markets cannot correct. Within the bull market, we can have violent corrections of about 30 to 40% which you need to be really mindful of.