Reliance Nippon Life, one of India’s largest asset management firms, sounded a note of caution, especially in the case of mid-cap and small-cap stocks, amid the continued rally in the Indian equity markets. Sunil Singhania, Chief Investment Officer – Equity, Reliance Mutual Fund, said in an interview to ET Now that he sees over-exuberance in many midcap stocks. Further, he also said that there is a froth built up in several small-cap stocks. Reliance Mutual Fund is India’s third-largest asset holder, with assets under management (AUM) worth over Rs 2 lakh crore.
Earlier last week, benchmark Indian stock indices made new all-time highs, continuing a sustained rally since the beginning of this year supported by BJP’s recent landslide win in UP state elections, prospects of revival in corporate earnings, implementation of GST (Goods and Services Tax), expectations of good monsoon and an upmove in the global markets. However, the mid-cap and small-cap shares are rising even faster. While NSE Nifty 50 has returned about 21% in the last one year, the NSE Midcap 50 has returned 43% during the same period.
Notably, the cash holdings of equity mutual funds in India rose to an average of 6% of Assets Under Management (AUM) for the quarter ended March 31, a recent Bloomberg report said citing data from Morningstar Investment Adviser India Pvt Ltd. Such high proportions of cash in mutual fund portfolios were last seen at the end of March 2012. The high level of the mutual funds’ cash holdings may be an indicator of their reluctance to put in money into the markets at current valuations.
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Interestingly, amid the high euphoria regarding Indian equities, where most of the market experts seem to be bullish, few other voices of concern have begun emerging too from certain influential participants, who advise treading with caution till further clarity emerges on corporate earnings and implementation of GST.
Earlier last month, renowned equity analyst Abhay Laijawala, Head, India Research, Deutsche Equities, said in an interview to CNBC TV18: “Before you really see any kind of upmove, you do need earnings to recover… At this time we are seeing that the expectations for FY18 appear to be on the higher side.” Laijawala also cautioned that transition to GST will disrupt earnings. “India’s taxation system is transitioning from a developing world system to better than developed world system, that has to have its transition impact. There will be a near term disruption.” he said.
Kotak Group is also cautious on the markets. Kotak Institutional Equities, led by one of the country’s top fund managers Sanjeev Prasad, in a strongly-worded note earlier last month, warned clients against the rapid rise in the equities markets without the support of corresponding fundamentals. “We are unable to fathom the rapid changes in the prices of stocks without any major changes in their fundamentals,” Kotak wrote in a note on April 25. “It seems to us that the sole investment thesis in some cases is ‘liquidity’, which is quite bizarre since ‘active’ investors should be deciding on the fundamental value of stocks rather than leaving it to a nebulous issue such as ‘liquidity’,” it added.
Nilesh Shah, MD, Kotak Mahindra AMC, is also among those keeping a pragmatic view. “Easy money-making part of the market is over, which was there probably in November and December 2016. Now the hard part of making money in the market has come,” Shah told CNBC TV18 in a recent interview. “There could be volatility in the market going ahead,” he added.