With headline indices look range-bound and valuations having undergone a period of correction, large-cap stocks are starting to look attractive again, as per R. Sivakumar, chief investment officer at Axis Mutual Fund.
He points out the current conditions provides the investors n opportunity to enter large-caps at more reasonable valuations but add a cautionory note that does not mean that market is cheap in absolute terms.
“Large-caps are trading more than one standard deviation below their long-term averages.” That means investors are paying relatively less to own large companies compared with their own historical valuations, but “I’d stress, not absolutely cheap.”
Where could the opportunity lie?
Sivakumar sees signs that some of the market’s laggards are beginning to turn, with banks emerging as one of the clearest examples.
“System credit growth has gone from around 10% a year ago to 16-18%, asset quality is clean, and margins just need the rate hikes the Reserve Bank of India is signalling,” he add
However, the broader investment opportunity is not limited to large-caps.
He points out, manufacturing, especially export-oriented companies is particularly positive in the mid- and small-cap segments. India accounts for less than 2% of global manufactured-goods exports, leaving considerable room for expansion.
Rupee depreciation bodes well for exporters, and the new free trade agreements (FTAs) with the European Union and the UK bring us to tariff parity with the likes of Vietnam and Bangladesh. Also, private-sector capital expenditure has also revived. Sivakumar argues that headline aggregate capex looks weaker because infrastructure spending has slowed. “Strip that out, and private capex appears to have improved,” he said.
Should investor considor mid- and small-caps?
Speaking about the mid- and small-caps, and whether to keep on investing in this sector, he said that they look expensive on a standalone P/E basis, but that’s where the growth is.
“When Nifty earnings were growing around 8%, mid- and small-caps were compounding 15%-plus, and that’s accelerating even as Nifty-level earnings are picking up. A stock at 30-40 times on 30% earnings growth looks very reasonable a year or two out. So, the real question isn’t the multiple; it’s whether the growth is real. That said, they’re trading about one standard deviation above long-term averages, so there is some valuation risk, and I’d be careful stock by stock wherever expectations have run ahead of fundamentals.”
He advises that if an particular investor is only in small-caps, he should diversify into a multi-cap or flexi-cap so you have exposure across the spectrum, and then stay the course.