Small-caps likely to do well over the next year: 360 ONE's Mayur Patel

Earnings of small-cap companies in the current financial year (FY27) may grow at a 30 per cent rate compared to the mid-teens for large caps, said Mayur Patel of 360 ONE Asset.

Nifty 50 PAT is likely to grow by over 20 per cent year-on-year in the September quarter, said Mayur Patel, president and fund manager, Listed Equity, 360 ONE Asset in an email interview with Ananya Chaudhuri. “Further out, we expect earnings growth of around 14 per cent in FY28 after a strong FY27,” he added. Edited excerpts: 

What triggers could drive the markets higher over the next 12 months?

 

Despite this year's volatility, the fundamental backdrop for Indian equities remains supportive. We see three key triggers for markets from here. The first is earnings. After strong June-quarter (Q1FY27) earnings, we expect September-quarter (Q2FY27) earnings growth to exceed 20 per cent. The second is exports as August merchandise exports rose 26 per cent Y-o-Y, with electronics exports nearly doubling. The third is macro relief. Stabilisation in global yields, West Asia-conflict resolution and clarity on US tariffs. 

What’s your view on small-caps? We expect small-caps to keep doing well over the next year, as their outperformance has been driven by earnings growth rather than only valuation re-rating. The FY27 earnings are expected to grow around 30 per cent for the smallcap index against mid-teens for largecaps. Capital goods, defence, EMS, and CDMO are leading this growth. Valuations remain reasonable, with the Nifty Smallcap 250 at a modest premium to its long-term median price-to-book. 

Expectations from the Q2-FY27 earnings season? The Nifty 50 PAT is likely to grow by over 20 per cent year-on-year in the September quarter. Further out, we expect earnings growth of around 14 per cent in FY28 after a strong FY27. We believe automobiles will lead. Among financials, banks should see benign asset quality and stronger credit growth, while NBFCs continue to expand their loan books briskly. Consumer discretionary should see steady growth. Further, industrials, telecom, metals and energy could possibly post healthy earnings growth. The softer spots are likely to be oil marketing companies (OMCs), consumer staples, large pharma, and IT services. 

Despite India’s strong macro fundamentals FIIs are avoiding domestic markets. What factors could trigger their return?

 

 

Foreign investors have stayed away because rising US yields have narrowed the India-US yield gap to about 200 bps, crude rose around $100-110, and global funds have chased the AI trade in markets like Taiwan and Korea.

 

A sustained return would need three triggers: stabilisation in global yields; a resolution of the West Asia conflict, which would bring crude down and ease pressure on the rupee; and clarity on US tariffs. Strong earnings delivery would add to this.

 

India’s underperformance over the last two years has brought its price-to-book premium to emerging markets down to about 30 per cent from a peak of 150 per cent. We see these levels as compelling in relative terms. 

Flexi-cap fund inflows rose more than 30 per cent in September. What is driving this surge and do you expect it to sustain? 

Flexi-cap net inflows rose due to lower redemptions, while gross inflows held steady. The underlying earnings growth across small and midcaps has picked up well, and domestic investors have responded after two years of market correction, with resilient SIP contributions and rising lump-sum flows in September.

 

Risk-reward across market caps, sectors, and factors has been shifting. The mandate gives the fund manager the flexibility to invest across segments of the market and capture this uptick. 

What factors are keeping investors away from multi-asset allocation funds despite market volatility? Inflows into multi-asset allocation funds saw muted growth but have stabilised at around ₹3,700 crore a month over the last three months. The category has also continued to broaden its investor base, with folios rising to over 61 lakh from about 52 lakh in March, and assets above ₹2 lakh crore. The moderation largely reflects the hawkish interest rate outlook and effect of time preference. Equity corrections also drew investors to buy the dip directly through equity funds. 

What is your outlook for gold & silver in a high interest rate scenario?

  

Gold has corrected about 25 per cent from its January peak to around $4,200 an ounce as the US Federal Reserve hiked rates in the backdrop of rising real yields, and a strong US dollar raising the opportunity cost of holding a non-yielding asset. In the near term, these headwinds are likely to persist. Once the rate cycle peaks and the US dollar eases, gold should regain momentum. The medium-term case, however, remains intact. Central banks continue to buy gold steadily as they diversify reserves, geopolitical risks, and high global debt levels keep its role as a hedge relevant. Silver is likely to remain more volatile, given its dependence on industrial demand alongside its precious metal appeal.

 

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