Why is the market showing resilience against all negative medical news?
The market is now discounting that vaccination will eventually overcome this pandemic. We have seen successful implementation of vaccination in countries like US, UK and Israel. There are countries like Chile and Seychelles where cases remain high despite vaccination. However, Seychelles and Chile have used Chinese vaccines majorly and that is one of the reasons why they are facing an issue. So at this point of time, the market is trying to ignore the 3-month impact of the pandemic and hoping that vaccination will allow normalisation of economic activities.
Should one shift exposure from largecaps to smallcaps now?
The smallcap index is still about 8 per cent lower than its high reached in January 2018. But from a market-cap perspective, it is 30 per cent higher than the Jan 2018 figure. This is primarily because about 150-160 stocks in the smallcap index have changed over the last 2-3 years. From a valuation point of view, smallcaps are fairly valued just like the largecaps and midcaps. They were partially undervalued in 2019-2020 but now they are fairly valued. So our call has been that you should be neutral weight across largecaps, midcaps and smallcaps. Build your portfolio on a bottom-up basis, stay with less leveraged companies, especially in smallcaps. Try to invest in companies where the governance is reasonable. A bottom-up portfolio in smallcaps is more appropriate.
What are your takeaways from the quarterly earnings that have been reported so far?
By and large, the March quarterly results have been in line with expectations or ahead of expectations. The trend we saw from September 2020, when corporate results were reasonably ahead of analyst estimates, continued in December. Analysts then upgraded their earnings for the March quarter. The expectation has been more or less in line with the enhanced earnings estimates.
However, people are interested in the future. Most of the management is saying that they do not know what will happen in the next 3 months because of the second wave. Thereafter, they believe that the business momentum will sustain.
We saw in the previous lockdown that the big became bigger. The companies, which are large in size and have access to capital, continued to do well and smaller companies suffered. By and large, listed entities are bigger in nature. They grabbed market share from smaller companies and those in the unorganised sector. So after lockdown, they continued to deliver better returns.
What is your outlook on capital flows in the market? The FIIs have been selling, while DIIs are buying.
We have seen in the past that if there is a correction after a very strong rally, then mutual funds start receiving flows. In the second half of 2020, we started seeing redemption and once the correction began in March, we started receiving flows.
Positive flows will continue as the number of SIPs keep on increasing in both quantum and value. Lumpsum investors are also coming in through systematic transfers. So for FY22, mutual funds should be a net buyer along with other domestic institutional investors like insurance companies and pension funds.
Retail and HNI investors are also looking to buy into this correction. Many people missed out last year’s rally and so they are looking to get into the market. There are people who want to increase their allocation to equity during a correction. So domestic investors will support the market.
We saw some selling by FPIs in April. However, when we speak to our FPI clientele, they say that India should be able to overcome the situation with vaccination. There may be periods when FPIs sell but in the rest of FY22, if we bring Covid under control, they will be buyers.
