 "Anand Radhakrishnan")
In terms of earnings growth, there isn’t much difference between largecaps and mid and smallcaps to justify the differential in stock performances, says ANAND RADHAKRISHNAN, managing director and chief investment officer, emerging market equities (India), Franklin Templeton. In an interview with Abhishek Kumar in Mumbai, Radhakrishnan says that the realistic expectation should be a correction in mid and smallcaps rather than a further rally in largecaps to bring down the valuation differential. Edited excerpts:
How do you view the rally in mid and smallcap stocks? Do you see froth building up?
The rise in stock prices isn’t completely out of sync with the fundamentals, as seen in the aftermath of demonetisation.
This time around, the depth in these segments, in terms of the number of companies reporting better numbers, has improved. More and more companies are reporting all-time-high numbers, be it turnover, operating profit, or net profit. There may be a temporary overshoot, and some corrections will again make them attractive.
Are you still finding ideas in this space for fund deployment?
The number of ideas is a lot higher in the mid and smallcap space compared to large caps. As the economy expands, the growth becomes deep-rooted and broad-based.
The speed of deployment depends on both factors — the availability of ideas and how quickly you can identify them and buy the shares at the right price.
Even if we do not find new ideas, we have the scope to deploy additional capital in stocks that we already own. However, investors should take a measured approach when investing in mid and smallcap funds.
Do you expect the momentum to now shift towards the largecap side?
In terms of earnings growth, I don’t see a huge gap in the performance of largecap companies compared to their smaller peers. The difference is not significant enough to justify the differential in stock performances.
The sharp rally in select small and midcaps is largely driven by factors such as a lack of enough free float and liquidity issues. Hence, the more realistic expectation should be a correction in mid and smallcaps rather than a rally in largecaps, given that they are trading at a slight premium.
Have you made any major changes recently?
There has been only one significant change — we have reduced exposure to financials, in line with our change in stance from ‘overweight’ to ‘neutral’.
Right now, our bets are largely on domestic growth ideas, like infrastructure, capital expenditure, and consumer discretionary. Sectors that are considered defensive (like consumer staples and pharmaceutical) or those linked to global growth (like information technology and industrial) are off the focus for us. The primary reason is that we are betting on growth. If growth happens, we will do better, but if it falters, then defensive-oriented funds will outperform.
What is your general view on the recent initial public offerings (IPOs)? Do you see value in them, or are most trying to take advantage of the buoyant market?
One simple way to figure it out is to look at the business model — is it truly a new idea or are they just coming out with an IPO to benefit from the successful listing of a similar company? It is important to identify differentiated business models as against me-too listings. Capital flows generally follow disruptive new ideas. There were some IPOs with such potential this time around.
Amid growing interest in smallcaps, do you plan to expand coverage and even look at the microcap space?
We are constantly adding resources to our team in line with market expansion. I don’t think there’s a need to go further down the market capitalisation lane, given that there’s scope for investment in the top three market capitalisation segments.
Most financial goals are achievable through the existing products themselves. Any new product with higher risk would make sense for a small set of investors. Having said that, the industry will keep on innovating, and it’s the right thing to do.
