Small cap indices are trading above long-term averages currently. There are certain sectors and stocks that are expensive and should be avoided. At the same time, there are some pockets of value and several bottom-up stories which are growing fast and available at reasonable forward valuat
1.Stagger investments to capitalize on volatility: Chirag Mehta of Quantum MF
ETMutualFunds spoke to Chirag Mehta, CIO - Equity, Quantum Mutual Fund, recently. We spoke to him about his new small cap fund launch, future course of inflation, interest rates, markets, among others.
2.Why a new small cap fund?
Given our strong in house research capabilities, we believe we can craft a portfolio of quality small cap companies and while also addressing sizing, liquidity issues peculiar to the small cap space which often results from a large size.
3.How will he deploy NFO money?
The small cap universe is large and much diversified as compared to large cap universe, we see many attractive pockets of investment opportunities at these prices from a long-term investment horizon perspective. Themes like Financial inclusion, transition to EVs, Import substitution, China+1, Renewable Energy are themes which we feel have good earnings potential in the medium to long term.
4.Can investors continue to invest in small caps?
Small cap indices are trading above long-term averages currently. There are certain sectors and stocks that are expensive and should be avoided. At the same time, there are some pockets of value and several bottom-up stories which are growing fast and available at reasonable forward valuations.
5.What should be the strategy?
Investors can continue to invest in this space but look for a quality portfolio available at reasonable valuations for lump sum investments. SIP has always been a time tested approach to invest, so if you have adopted a SIP approach, please continue.
6.His view on the market
While relative valuations remain rich, India is in a comfortable spot due to the economic upcycle it finds itself in and strong earnings growth prospects. As such, we are bullish on Indian equities in the medium to long term. In the short term, volatility cannot be ruled out considering the impact of deficient rainfall on inflation and rural demand, elevated global interest rates, political uncertainty as we near elections or escalation of geo-political tensions.
7.Views on geopolitical situation, inflation, interest rates, etc
Geopolitical tensions and their impact on commodity prices remain a key variable to track. With US growth looking resilient for now and inflation yet to reach 2%, markets can expect continued hawkishness from the Fed in the near term, which makes the Fed over-tightening a big risk. The resulting pullback in activity could trigger some policy easing by the Fed in 2024. While currently the first rate cut is expected only in mid-2024, the Fed’s hawkishness could get tested sooner in case of a major growth setback or a financial accident triggered by elevated interest rates
8. On rate cuts by RBI
With global inflation still above central bank targets, one can expect a ‘higher for longer’ monetary policy stance. Easing of policy is expected in mid-2024 as central bankers try to strike a balance between curtailing inflation and supporting growth.
9. Is it the right time to invest in gold?
Investors can use a buy on dips approach this festive season to build their gold allocation. Short-term gains in gold from this level are possible if the Middle East situation worsens. On the flip side, if the situation improves, we could see the geopolitical risk premium in prices come off.
10. Advice for investors coming year
Don’t be too greedy or too fearful. Have a prudent asset allocation of equity and gold in your portfolio and stagger your investments to capitalize on the volatility induced by global and domestic headwinds.
