‘Correction cleared some smallcap froth, but largecaps still better placed’
While the risk/reward remains favourable in the largecap space, investors with a high risk appetite and under-allocation to smallcaps may consider increasing exposure to companies that have experienced stock price corrections, says HARISH KRISHNAN, co-chief investment officer and head of equity at Aditya Birla Sun Life Asset Management Company (AMC). In an email exchange with Abhishek Kumar, Krishnan notes that the AMC remains bullish on domestic-oriented businesses. Edited excerpts:
Has the recent correction in smallcap stocks brought valuation comfort? Which sectors within the smallcap space are most attractive right now?
Smallcap indices have corrected by almost 12 per cent from their peak and are now back to the December 2023 level. The correction has cleared some of the froth, but the indices have still seen a more than 50 per cent run-up in the past year. However, there are stocks that have witnessed deeper corrections compared to the index.
Given that smallcap investing is more of a ‘bottom-up’ play, it’s challenging to provide a generic view at the sectoral level. However, we see more opportunities in sectors such as chemical, consumer durables, harmaceutical, automotive ancillaries, capital goods, and financial.
Is it the right time for investors with low smallcap holdings to increase
their exposure?
Investors should adhere to their asset allocation framework. We recommend investors take a neutral stance on equities and be overweight on largecaps, given the better risk/reward in this space. Corrections like these offer investors an opportunity to rebalance their asset allocation. If the risk profile allows, investors who are substantially under-allocated in smallcaps should consider increasing their exposure.
Is Aditya Birla Sun Life Mutual Fund still bullish on domestic-oriented businesses as it was at the start of the year? Which sectors are best placed to deliver?
We continue to maintain a positive outlook on domestic cyclicals. Sectors such as automotive, real estate, consumer durables, consumer discretionary, and beneficiaries of the investment theme like manufacturing and infrastructure are where we have a positive medium-term outlook.
In addition to fundamentals, we also analyse sectors from a business cycle perspective. This approach, which considers changes in profit pools, market capitalisation, and ownership, indicates that sectors like automotive, capital goods, real estate, cement, and information technology (IT) have the potential to perform well in the medium term, despite already performing strongly over the past 18–24 months.
On the other hand, pharmaceutical, consumer durables, metals, and media may see a reversal of fortunes. We remain underweight on consumer staples and defence from a business cycle perspective.
What is your take on export-oriented businesses?
We believe that Indian companies’ global competitiveness is increasing. While there are nearterm concerns about a global slowdown and the prospects of a recession in advanced economies, we see an opportunity to increase exposure to companies exposed to global markets, such as
IT services, automotive, capital goods, pharmaceutical, or chemicals. macroeconomic vulnerabilities were a major concern for global investors interested in Indian companies, affecting their true valuation. However, things have changed dramatically in recent times. We now have a counter-cyclical approach to both fiscal and monetary policy, even as growth remains resilient.
While global developments may introduce uncertainty to Indian shores, our counter-cyclical approach means we have enough levers to drive growth, even in the face of exogenous shocks.
While valuations in some pockets remain stretched, overall they are closer to long-term averages, especially in the largecap space.
CORRECTIONS OFFER INVESTORS AN OPPORTUNITY TO REBALANCE THEIR ASSET ALLOCATION. IF THE RISK PROFILE ALLOWS, INVESTORS WHO
ARE SUBSTANTIALLY UNDER-ALLOCATED IN SMALLCAPS SHOULD CONSIDER INCREASING THEIR EXPOSURE”