Small-cap deployment only a near-term problem: Shridatta Bhandwaldar

Equity mutual funds (MFs) have seen a surge in outflows in recent months as investors booked profits after a major rally in stock prices. In an email interview with Abhishek Kumar, Shridatta Bhandwaldar, Head Equities, Canara Robeco MF says investors should avoid making redemptions based on market movement, and should rather focus on their goals and liquidity needs. Edited excerpts:

Are concerns that markets have overheated after a sharp jump from this year’s lows justified?

There is a modest upfronting of returns that has happened over the last three month or so.  We believe that this is in line with the improvement in corporate earnings in the last two quarters (taking into account the estimates for the first quarter of financial year 2023-2024 or Q1FY24). Moreover, the cost of capital is expected to come down globally in the next few quarters. Considering these positives, there isn’t much of a reason for investors to worry about the rise in valuations, especially if their investment horizon is over two years.

Since the rally has fired up the equity returns, is it a good time to redeem some investments?

Redemption of MF holdings should depend on the liquidity requirements and financial goals, rather than a near term 10 per cent rally in the market. Before entering the ‘Bull Run’, the market had gone through a phase of consolidation between September 2021 and March 2023, despite a 15-20 per cent growth in earnings. Presently, the benchmark Nifty50 is trading at 19.5 times the one-year forward earnings – slightly higher than last 10-year averages. Hence, we are not worried about the medium-term prospects.

What are your earnings expectations? Do you see any sector throwing a positive surprise?

Analysts expect over 20 per cent year-on-year earnings growth for Nifty50 in Q1.  If oil marketing companies are excluded, the growth could be around 12-14 per cent.

What is your sectoral positioning right now? Have you made any changes after the rally?

We are constructive on both domestic cyclicals and defensives. Portfolios are predominantly overweight on automobiles, financials, industrials, telecom, pharma, hospitals, hotels and FMCG.

Expectations of another rate hike are building up in the US. How big a worry is it for the domestic market?

Most of the data points are indicating that disinflationary pressures are picking up in the US and thus any immediate hike in interest rates is unlikely to hurt markets incrementally. We have already passed the critical phase of the global interest rate-hike cycle without slipping into recession (except in Europe). Thus, as long as the rate hikes do not lead to recession, as was expected for the US, it is a better outcome than expected. 

Small-cap funds have attracted heavy flows in recent months, making deployment a challenge for some fund managers. Are you also facing such an issue?

From a near-term point of view, there is exuberance and that’s leading to some challenges. However, from a medium term perspective, there are enough opportunities in the broader market. We believe that the money flowing into small-cap funds has at least a 3-5-year horizon and we are looking to deploy the money accordingly.

Equity fund launches have picked up in recent weeks. Canara Robeco MF has also come out with a multi-cap fund. Do you feel the timing is right given that the market has run up a lot in recent months?

We have launched the multi-cap fund to create wealth for investors in the medium-to-long term. The exuberance that prevails in some parts of the market right now won’t matter after a period of time.  We believe that this is a balanced and diversified portfolio, which removes market cap allocation risk for investors.