Markets are at starting point of a mid-to-long term bull run: Ajit Banerjee

The mid and small caps look a bit heated up from a near-term perspective. The earning yields of mid and small-cap stocks on a trailing 12-month basis are higher than that of largecaps

It has been a good run for the equity markets off-late with the Sensex and the Nifty scaling up to record highs. AJIT BANERJEE, chief investment officer at Shriram Life Insurance Company, shares his outlook for the markets with Harshita Singh in an email interview. Edited excerpts:

Is the current market rally sustainable or are equities now ripe for correction?

Currently, it seems that Indian markets are at the starting point of a mid-to-long term bull run. The small and midcap indices have outperformed the larger benchmarks during the current quarter, lending strength to the trend of narrowing valuation differential. Further, in view of the increase in the size of our economy and market, India’s weightage in global portfolio allocation has also increased. This leads to an increase in foreign money inflow. The DII and SIP allocations are also pretty strong. All these factors are driving the market. Therefore, immediate large-scale corrections don’t seem apparent currently. But some intermittent pullback cannot be ruled out.

Is it time to be cautious given the run up?

Yes, and invest selectively in stocks. Periodic profit booking can also be resorted to if the short-term objective of the investor has been achieved.

How should markets read the large block deals and promoter selling? Why has there been a rush to take money home?

Generally, the market perceives any stake sale by the promoter as worrisome as it may indicate that the promoter is losing confidence in the business or expecting lower growth in profits in future. However, this may not always be the case. The markets have run up quite a lot and there is abundant liquidity from domestic and foreign buyers hence block deals are getting done at very attractive levels. Some promoters or funds are taking this opportunity to offload some of their holdings to deploy for future investments or for pursuing their interest in other business opportunities and unlocking their existing investments so that their dependence on external funding gets reduced.

How would you suggest investors approach the mid, smallcaps?

Some data points hint that the mid and small caps look a bit heated up from a near-term perspective. The earning yields of mid and small-cap stocks on a trailing 12-month basis are higher than those of large-caps. From a market capitalisation perspective, the mid-and smallcap cohort is now 28 per cent of the total market cap of NSE 500 stocks against the average of 23-24 per cent. So, it’s pretty evident that the market has moved and re-rated a lot of mid and small-caps.

What is the best way to go about investing in the debt segment?

For institutional investors who have a long-term bond portfolio to manage, following a barbell strategy may make sense at this stage. Other investors may follow a diversified asset allocation model with the flexibility to toggle between various asset classes depending on their relative positioning. Retail investors can take exposure in debt securities of slightly mid to long-term duration at present. The rates are at their peak for this cycle. Once the rate cuts start from the next fiscal, the mark-to-market return of the portfolio will improve and then the investor can exit at a gain or continue to enjoy the accrual at a higher rate. A roll-down strategy can work for him.

What are your sectoral preferences?

Fast moving consumer goods (FMCG), financial services, auto, and banks are showing very good performance on a yearly basis. Information technology (IT) and Pharma also are recovering pretty well from an interim weak patch. From a medium-to-long term horizon, we recommend investments in the power sector including renewables, IT, defence, FMCG and financial services.