The benchmark indices rallied in the last few days but there was no comeback in small and mid cap stocks. What does that tell you about the market health?
There is a liquidity surge abroad. The Fed has spoken of a soft interest rate regime for three years. About $13 trillion of liquidity is going to be pumped in and the world is coming back to a V-shaped recovery faster than India which means that export-oriented sectors of India are going to benefit. So naturally, there is a heightened buying in IT and pharma.
Because of the V-shaped recovery, work from home, changing business dynamics on how IT plays a role, Nasdaq is also performing. That is where the Indian companies have been very smart in pitching. From an FII’s perspective, it is a much better bet than a commodity-oriented Brazil, Russia or China.
While there is redemption from existing investors, a lot of new money is coming in through large cap oriented NFOs.
Various multi-asset funds are also going to allocate more to large caps. So, there is large cap buying support from domestic MFs to some extent.
The third point here is about multi-cap funds. The rally in small and midcaps was not driven by buying, but shortage of liquidity. If I am holding a small cap stock as a player, when I see this news item (about Sebi’s new rules) I think the fund manager is going to buy and so I dry up liquidity from the market. I hang on to my stock and that pushes up the price. A discussion is going on with SEBI on this issue. Even otherwise, fund managers are not going to just go and buy small and mid caps because SEBI has changed the rules.
They have multiple options. They can convert their fund into a large cap, or large and mid cap, or encourage their investors to switch to large cap funds. The initial thought that the SEBI regulation is going to lead to a huge drive in small and mid caps has proved false.
Domestic fund managers are going to favour the larger IT companies. Pharma is about bulk drug supply, vaccine or the cure. So Indian pharma will get a good business order book based on that.
Market participants are just playing safe and betting where there is more certainty of earnings. A good sector is defined as those where there is visibility, good companies are those which can grab market share. They are to get a higher premium leading to polarisation in the short run.
A sustainable growth in the small and mid cap space needs clarity on the shape, strength and the speed of the recovery.
What would be your biggest sectoral overweights and underweights?
I am not trying to bet against the market, so I think IT and pharma are continuing to be my very overweight positions relative to the benchmark.
What sectors are you underweight on or have a negative call on?
We are neutral on PSU banks. I think NBFCs in the small and mid cap space will take some time to recover. We are underweight on industrials and cyclicals. Historically, we have been overweight on them and so we are not selling out.