It is tough to predict how the geopolitical situation will pan out, but higher crude oil prices could be negative for India, said S Naren, executive director, ICICI Prudential Asset Management. In a press meet on Monday, Naren said investors can make lump sum investments in smallcaps, which are undervalued after the recent sell-off. Edited excerpts:

How will the geopolitical tensions between Iran and US impact India?
It is tough to predict how the geopolitical situation will pan out. However, crude oil going up is negative for India. If the situation deteriorates further from here, it will impact equity markets, the rupee and also the fixed income markets.

In 2019, only the top 10-15 stocks rose, while midcaps and smallcaps remained weak. Will this continue?
For the top 10 stocks, the market cap has risen 43% from February 2018 to December 2019 while for stocks ranked 251 and below, the market capitalisation has fallen by 52%. Incidentally, in 2007, investors believed that roads were a requirement and cars were not essential. That era is known as the infrastructure boom days. Currently, investors believe that cars are a requirement but roads are not, which again may prove to be a folly in the days ahead. As an investor, it is important to remember that the current rally is very narrow in nature. The Indian economy and the resultant market is more than the top 10 companies which currently seem to be shouldering the up-move.

You are investing in an undervalued asset class at the bottom of the economic cycle. Over 3-5 years, we feel that smallcaps would outperform large caps.

-S Naren

Historically, it has been seen that with time such concentrated rally moves become broad-based in a gradual manner. So, it is essential for investors to look beyond the overpriced quality names and over a period, shift to value-oriented names.

What has changed in the smallcap space?

In mid- December, our market cap model has suggested that the share of smallcaps in the overall market cap has fallen to 8%, which is similar to 2013 levels. This is after having risen to as high as 18% in 2017. Smallcaps are currently offering a better margin of safety in terms of risk spread over large caps. Our models are decisively turning more positive on smallcaps.

It is suggesting lump sum as well as staggered investments in smallcap funds with a 3-4 year view. In the last two years, smallcaps have corrected by 40% and have underperformed significantly compared to largecaps. I look at economic cycles. Today, credit growth is at the bottom. When credit growth is at a bottom that is the time to take risk. You take risk in an undervalued asset class. An undervalued asset class is the smallcap segment. So, you are investing in an undervalued asset class at the bottom of the economic cycle. Over 3-5 years, we feel that smallcaps would outperform large caps.

What are you telling your investors?

Earnings growth has not come in a big way in the last five years. Quality and mega-caps are two asset classes that have peaked. Further, given that the recovery in domestic macros is likely to be protracted it is very likely that the markets may tend to be volatile in the interim. Add to this mix, global factors such as the rise in crude oil prices, geopolitical tensions, all of which tend to be unpredictable and are factors which can further cause markets to remain volatile. Given this setting, for a retail investor, it is imperative to be mindful of asset allocation. While in the short run the benefits of asset allocation may not be visible, it is only over the long term that one tends to appreciate the impact asset allocation has on portfolio gains.

Valuations of several PSU stocks are low. Is there value in these set of stocks?

While valuations of several PSU stocks are attractive, they have not recovered because there is a fear of disinvestment in the March quarter. If that does not happen, PSUs could turn attractive.





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