There is caution among retail investors, says Sharekhan's Gaurav Dua

With the broader markets doing comparatively better than their large-cap peers, Gaurav Dua, senior vice-president, head-capital market strategy and investment at Sharekhan by BNP Paribas, in conversation with Puneet Wadhwa in Mumbai, says one can invest gradually in good-quality mid- and small-cap companies now, and the returns could be quite handsome over the next two years. Edited excerpts:
 
What is your interpretation of how the markets have played out these past few months?
 
Since July 2021, the National Stock Exchange Nifty has largely consolidated in a broad range of 2,000 points, ranging between 16,000 and 18,000, notwithstanding runaway inflation and the consequent aggressive rate hikes in India and worldwide.

 

Lately, the Nifty has sustained above 18,000, backed by an uptrend in most global equity markets. Foreign flo­ws, too, have turned positive.
 
On a rolling 12-month basis, foreign institutional investor (FII) flows into the Indian equity market have turned positive for the first time since December 2021.
 
The quarterly results season has neither disappointed nor resulted in any material downgrade in consensus earnings estimates for the Nifty in 2023–24 (FY24) and 2024-25.
 
Even with uncertainty related to the debt ceiling in the US, weak monsoon, and signs of lethargy in consumer spending, we are constructive on the Indian equity market.

 
Share some granular interpretation of the 2022-23 (FY23) January-March (fourth quarter, or Q4) results.
 
Q4FY23 results of India Inc have been a mixed bag, with the banking and automotive sectors reporting strong growth in earnings.
 
Conversely, metal, information technology (IT) services and other global commodity companies have been a drag on Nifty earnings.
 
On an aggregate basis, Nifty companies have reported 11-11.5 per cent growth in earnings, which is largely in line with expectations.
 
Intriguingly, the results from many mid-cap companies have exceeded expectations. It has been a decent performance in a difficult quarter with little damage to consensus earnings.

 
The progress of the monsoon and the Reserve Bank of India’s monetary stance will be crucial factors that could influence consensus estimates.
 
Mid- and small-cap stocks have outperformed their larger peers in FY24. It is widely believed they are the last ones to move up the bear ladder, and just before correction sets in. How do you interpret the recent upmove in light of this?
 
With the Nifty sustaining above 18,000 after a sharp rally, the activity in the broader market has also picked up these past few months. This doesn’t surprise us.
 
Going by experience, the one-way rally in the broader market lasts for 17/18 months (on average) and is followed by a corrective phase of 18-24 months.

 
The broader markets have already seen close to 18 months of correction. It might be difficult to call out the bottom and start a new rally in broader markets at this stage. However, one can certainly accumulate or invest gradually in good-quality mid- and small-cap companies now and the returns could be quite handsome over the next two years.
 
FII flows have seen a reversal lately. Domestic institutional investors (DIIs), however, have been selling. How do you interpret this?
 
DIIs have been buyers at lower levels and seem to have taken a tactical call to increase cash level by taking some profits off the table. Also, there could be some redemption-driven outflows close to the previous all-time high levels, if past behaviour is any indicator.

 
Alternatively, foreign inflows seem to be driven by the global risk-off trade. The central banks in the US and Europe eased the liquidity conditions to support banks and avoid spreading the contagion of the banking crisis.
 
How is the mood among retail investors closer home?
 
There is caution among retail investors, and this is reflected in the declining trend in the active client base at an industry level over the past year or so.
 
Some of the new-to-market clients could have drifted towards fixed income with rising yields and/or investment in real estate. However, retail participation has picked up lately due to rising activity in the broader market.

 
Also, many retail investors are increasingly aware of the importance of investment in equity markets. The fairly steady retail inflows into systematic investment plans reflect the same. 
 
Which sectors/stocks have been on your to-do list thus far this calendar year?
 
We are positive on automotive, engineering and building material space, and believe it is time to start accumulating IT services and financials based on expectations of the interest-rate cycle peaking in the US and India.
 
In the consumption space, we are somewhat selective. Valuations are not cheap anymore in consumer staples, and discretionary could get impacted by a slowdown in consumer spending in the near term.