In conversation with Asit Bhandarkar, Senior Fund Manager (Equity), JM Financial Mutual Fund

Large investors, including promoters and private equity investors, are liquidating or selling sizeable holdings, thereby increasing price volatility

What is your evaluation of the present state of the market?

Nifty 50 has given single-digit returns year-to-date as compared to the Mid-Cap and Small-Cap indices which have yielded about 25-30 per cent returns. The rally in the broader market driven by a massive retail interest and mutual fund (MF) flows into the small-cap segment has been the highlight of the year till date. FPIs have also participated in the rally and now market valuations have limited upside on account of which most of the capital appreciation will have to come due to earnings’ growth. Large investors, including promoters and private equity investors, are liquidating or selling sizeable holdings, thereby increasing price volatility. Further, corporate India, including banks, might need to raise equity to be prepared for future growth. The constant demands for capital along with secondary sales will likely cap price performance for the interim. 

In your view, how has the Q1FY24 earnings’ season fared? What were the hits and misses?

Corporate profits have been robust with an earnings growth of 33 per cent year-on-year for the recent quarter gone by for comparable companies in the BSE 500. However, this profit increase has been on the back of a few particular sectors and certain one-offs such as a favourable base, etc. and to that extent unlikely to sustain. From a sectoral perspective, PSUs, particularly banks and energy stocks, performed well this quarter. The metal and chemical sectors clearly have had their fair share of misses.

Is there an indication of excessive buying in the broader markets? Do you anticipate the small-cap and mid-cap rally to persist?

As of August end 2023, the share of Nifty 50 market capitalisation in NSE 500 has declined to about 53 per cent – way below its 15-year mean level of about 60 per cent. Our analysis suggests that liquidity and future expectations are leading to valuation expansion of the small-cap and mid-cap segments rather than the earnings’ themselves. This leaves the segments vulnerable to any potential volatility, which the markets might face due to global or local issues. We are cautious, as we find the risk-reward unfavourable after the recent sharp run-up in the small-cap and mid-cap segments. That said, these segments have been continuously attracting substantial flows via MF SIP and to that extent we may see valuation correction over a period rather than a sharp fall.

What is your outlook on the effect of increasing crude oil prices and currency fluctuations on the Indian markets?

India being an energy importer always remains vulnerable to sharp increases in crude oil prices and therefore slippages in our current account deficit position puts the rupee at the risk of devaluation. Typically, in the past, during episodes of an oil price hike, FPIs see India as a relatively less attractive investment destination, thus leading to volatility in the markets. This is a key risk that we are monitoring closely.

What additional factors could influence the markets positively or negatively?

High energy prices on the boil could lead to a global slowdown, which may lead to a reversal in the fortunes of our manufactured exports. Domestically, rainfall has been erratic and there is fear of a lasting negative impact on food prices. Ahead of elections next year, the risk of populist measures increases, which could threaten fiscal discipline and raise rates.