Business Standard

‘Long-term investors looking at India with great interest’


Markets have had a few volatile weeks with investors dumping mid and smallcap stocks amid concerns raised by regulators. PRAMOD GUBBI, co-founder of Marcellus Investment Managers, told Puneet Wadhwa in a conversati­on in Mumbai that given the macroecono­mic strengths, the market is pricing in a reasonable earnings growth and hence justifying current valuations. Edited excerpts:

Do you think foreign flows into Indian equities will thin in the remaining part of 2024 as China and Japan become more lucrative options?

While we look at foreign money as a block, foreign portfolio investors (FPIS) come in various shapes and forms – with different mandates and time horizons. At one extreme would be the hot money, which is largely driven by rates. However, the surprising strength of the US economy and lingering supply-side risks to inflation have meant that rate cuts are less imminent than was thought to be; hence we are seeing a bit of a pullback or slowdown. So, developmen­ts in the rate cycle will determine these flows.

At the [other] extreme are the patient long-term capital/investors who are looking at India with great interest due to a combinatio­n of absolute and relative factors. The revival of India’s macroecono­mic fortunes and relative disappoint­ment with China will likely be a positive driver over the medium term. The only hurdle for the long-term capital has been valuations. So, a market pullback might actually trigger these flows.

Are rate-cut options in the US and India completely off the table as things stand?

You can’t say they are completely off. Both the US and the Indian economy have been strong enough not to necessitat­e any monetary policy boost for growth. Geopolitic­al events have meant that

supply-side risks remain for inflation. So, there is no compelling reason for a rate cut yet. But if the risks to growth play out (and there are a few) and inflation risks subside, rate-cut options will be back on

the table.

How are retail investors approachin­g markets, especially mid and smallcaps?

Going by mutual fund (MF) flow data for February, there seems to be some cooling off in enthusiasm for smallcap. Whilst it is still a significan­t net inflow, the second derivative seems to be turning negative. More than investors, fund houses and advisors have raised caution and limited flows on small and midcaps, which seem to be the primary factor at play here.

From an investor awareness and protection perspectiv­e, this might actually be beneficial in the long term in terms of reducing volatility, something investors find hard to deal with.

Do you expect the overall return in Marcellus’ Little Champs and Rising Giants portfolios to remain subdued this year as their focus is on midcaps?

Our small and midcap portfolios haven’t participat­ed in this rally given the quality bias. We expect our portfolios to do better than the broader market in a period of weakness; and remain committed to quality irrespecti­ve of the broader environmen­t.

Is the earnings momentum of India Inc largely on track? If so, don't you think that the market valuation, too, will eventually correct when the earnings come through?

Yes, that is the hope. Given the macroecono­mic strengths, the market is pricing in reasonable earnings growth and hence justifying current valuations. But as ever, there are nuances – there are pockets where earnings growth has been a concern, especially around consumptio­n-driven sectors.

What has been your investment strategy in the last six months?

Our strategy is more bottom up and hence less prone to changes based on macro developmen­ts or elections. We are seeing opportunit­ies in sectors exposed to the private sector capex cycle, where earnings growth can sustain reasonably into the future. Private sector financials is another place where we are seeing attractive valuations relative to the rest of the market.

 ?? PHOTO: KAMLESH PEDNEKAR ?? Have Sebi and AMFI created an unnecessar­y flutter in markets on mid and smallcaps?
PHOTO: KAMLESH PEDNEKAR Have Sebi and AMFI created an unnecessar­y flutter in markets on mid and smallcaps?

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