In an interview with ETMarkets, Kadam said: “We expect the momentum to continue in small & midcaps though we suggest investors be selective and avoid the FOMO factor in picking stocks at the current market levels” Edited excerpts:
We are seeing some nervousness at record highs for Mr Market. How do you see things moving – have we hit the top for the moment?
When you are in your nervous 90’s, expect bouncers and choose your shots carefully. The domestic equity markets have had a dream run over the past few months, buoyed by healthy corporate earnings growth, reasonable valuations, resilient domestic macros, positive global investor sentiment, and the influx of FII and DII money.
In our view so long as these factors remain supportive, markets are here for a big inning and hence suggest investors add quality stocks from a 3-4 years perspective on market declines.
In the immediate term we remain cautious and expect market direction to be driven by –
a) Global macro & geopolitical developments,
b) ongoing earnings season,
c) movement in commodity prices sp. Brent crude which has surpassed $85, as I write this,
d) recovery in rural demand & overall consumer sentiments ahead of the festive season, and
e) FII flows.
We expect the price action in Small and mid-cap space to pick up further pace on the upside.
Interestingly the US Fed is open for further rate hikes. Do you see that could dampen the bulls party on D-Street?
For the US Fed, the risks of pulling back too soon and kickstarting another vicious inflation spiral remain higher than the risks of doing too much.
The US economy has proven resilient to the Fed’s hikes, with growth and employment both holding up in recent months. Investors are putting more weight on economic data while ignoring interest rate hikes, hence I think the markets should be able to digest another round of hikes as well.
In our view, the tipping point for this overseas bull party could come when corporate profit pressures force firms into austerity measures such as layoffs and capital expenditure delays, and households—having exhausted pandemic savings—respond by cutting back on discretionary spending and subsequent equity earnings and rating downgrades in H2’CY23.
Largecpas dominated the party on D-Street — do you think one should now look at going overweight on small & midcaps?
After months of underperformance, we are seeing good traction across small & midcaps stocks. This time it is primarily driven by their robust earnings outlook, attractive valuations (one needs to be selective), and improved corporate governance & compliance practices.
We expect the momentum to continue though suggest investors be selective and avoid the FOMO factor in picking stocks at the current market levels.
How do you see the recent Corp announcement made by the house of Reliance Industries as well as M&M expanding their business empire in different fields?
I will avoid company-specific comments. Though at an overall level, the capex momentum that started last year is gaining further strength with state governments and companies joining the Centre to invest in a horde of sectors right from simple infrastructure to data centres and electronics manufacturing.
We expect the capex cycle to pick up further pace going forward driven by –
A) Fall in input prices,
B) robust domestic macros,
C) low corporate debt levels,
D) stability in interest rates with the likelihood of RBI going for an extended pause, and
E) new PLI schemes
Commodity prices have bounced back. Do you think it could lead to a spike in inflation?
Yes, certainly the spike in commodity prices will have a direct bearing on domestic inflation if they remain elevated for a prolonged period. Now they remain volatile with sharp swings on both sides.
In India besides global commodity prices, we need to keep a watch on Food inflation which accounts for over half of the CPI basket.
The domestic retail inflation, which declined steadily for the past 4 months, jumped to 4.81% in June-23, driven by rising food and vegetable prices.
Hence, monsoon and subsequent sowing progress should be a key monitorable going forward coupled with other global commodity prices.
What is your take on the earnings trajectory for the rest of 2023? What is your take on the management commentary? Does the consensus sound cautious just like the IT pack?
Corporate India’s Q1’FY24 reported earnings performance remains robust while management commentaries remain mixed and cautiously optimistic.
As there are few who benefited from the decline in input costs like the manufacturing sector while some suffered on account of lower realizations (Chemicals, Metals & Mining) and weak global macros (IT and other Export dependent).
Going forward we expect some moderation in corporate India’s earnings growth on account of volatile commodity prices, rise in finance cost and weak global growth.
Things which investors should avoid doing especially when the market is trading at record highs?
I will say A) Avoid FOMO: If you missed buying something at lower levels, do not chase it and buy at elevated levels,
B) Avoid bulk buying: Stagger investments, and
C) Do not invest on the basis of unsolicited tips or bulk SMS
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)