For Dalal Street investors, 2021 was a stupendous year as crorepatis turned millionaires and the millionaires became billionaires.
The significant rally that stocks saw across the board in 2021, however, fizzled out in 2022 because deteriorating macroeconomic conditions globally and geopolitical risks raised questions over the frothy valuations of Indian equities, particularly that of smallcap stocks.
“Now that earnings froth is not there in the segment and valuations have in fact gone down below long-term averages, small cap stocks are rebounding from their intermediate bottom,” said Anil Rego, fund manager and Founder, Right Horizons PMS.
Unless there is some unexpected slowdown on the consumption side, it’s safe to say with the rate hike cycle peaking in the near future, small cap stocks have seen most of the correction from the peak, he added.
“The P/E multiples of small and mid-caps are near their 5-year averages, and in some cases, the valuations are at levels seen during Covid sell off,” said Divam Sharma, Founder of Green Portfolio PMS.
One of the main reasons for the outperformance of his portfolio was a sectoral rotation approach.
When IT, speciality chemicals and new-generation technology stocks faced the heavy selling, Gangil’s PMS stayed invested in auto ancillaries, banks, real estate, railway, infrastructure and some undervalued consumer players.
Gangil however, said that the smallcap stocks are now fairly valued and not undervalued after the steep correction.
Gangil is waiting for a further correction in speciality chemicals and IT names to enter into them.
Meanwhile, Rego of Right Horizons is constructive on the building materials segment, while being selective in NBFCs and manufacturing themes from the small cap side.
Divam Sharma of Green Portfolio is betting on pharmaceutical, speciality chemicals, textile, and capital goods stocks in the smallcap segment. Some of the names that the PMS is invested in include Aarti Drugs, Valiant Organics, and SP Apparels.
The time-cum-price correction that smallcap stocks have seen does pave the way for the Dalal Street bulls, but they have to take the “slow and steady” approach to win the race.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)