No big stock market returns in 2018! Equity99’s Sumit Bilgaiyan issues note of caution, says avoid small-caps

By: | Published: July 26, 2018 4:36 PM

The market is skewed at present, riding on the back of select large-caps. There is a potential risk that the headline indices may not sustain at those record levels unless there is a more broad-based participation, says Sumit Bilgaiyan, founder of investment advisory firm Equity99.

Sumit Bilgaiyan, Founder, Equity99

The domestic equity markets are currently in a triumphant mode with the benchmarks — Sensex and Nifty — scaling record highs since the past three trading sessions. However, market observers have issued a note of caution over the ability of the markets to sustain those highs.

The market is skewed at present, riding on the back of select large-caps. There is a potential risk that the headline indices may not sustain at those record levels unless there is a more broad-based participation, says Sumit Bilgaiyan, founder of investment advisory firm Equity99. Although no big correction is expected in the near term, he recommends investors to stay alert and focus on building their equity portfolio rather than expecting big gains in 2018.

In an exclusive interview with Porisma P Gogoi of FE Online, Sumit Bilgaiyan shares his foresights on the Indian stock market, with a special note of caution to avoid small-cap stocks at the moment.

The equity markets are currently in a celebratory mood. The Sensex hit record highs, and the Nifty reclaimed the 11,100 mark, being just inches away from its previous record high. What do you foresee for the markets going ahead? Will the bull-run continue?

We can’t call it a bull market because a bull market is where there are excessive returns and there is an excessive frenzy. Rising oil prices, weak global clues, and political uncertainty are not allowing the market to go up beyond a point. India’s macro story has deteriorated compared to last year. All these things together put the pressure on corporate earnings.

The current rally or strength in the equity market is skewed. Only a handful of large-cap index heavyweights have been supporting the index levels and that has led to the outperformance of our market compared with its peers. This skewed market performance poses a risk to its sustainability. It will be difficult to sustain these levels unless there is a more broad-based participation witnessed in the market.

On the positive side, Q1FY19 corporate earnings season, which has just begun, has been quite positive so far; the trajectory that started last quarter is being maintained. The micro factors, which are improving in India, need more support from the macros to sustain the market rally and make it more broad-based rally.

Is there any big correction on the cards lying ahead for equity markets? Should investors take short positions given the current market scenario?

We think investors should remain cautious in the near term due to geopolitical tensions, trade war, and now currency war building up. Of course, it is very difficult to predict a big correction in the near future. Any big correction would be a follow-up action of a global event which could affect all markets.

However, investors need to be conscious as we are now entering into an election year and we will continue to witness a rise in political uncertainty in India, which could be the trigger for PE multiples to move towards long-term historical average. Also remember that  India is heading for a rate hike cycle sooner or later, which would negatively affect the earnings of the companies.

We think the correction in the small caps stocks will continue at a couple of months. However, the broad-base index-base rally will continue to remain volatile. The Nifty Midcap index lost close to 13% and small cap shed 22% in 2018 against the 47% and 57% rally, respectively, in 2017.

What is your view on the broader markets? What approach should investors take to invest in mid or small caps? Any such stocks that you would recommend?

We are in a stock-specific trading market which is driven by earnings, events and valuation. And this market offers plenty of trading opportunity to pick a stock at right valuations, especially large-cap stocks. However, one should avoid small-cap stocks at the moment. The BSE small-cap index turned 4x over the last five years partially on account of PE expansions

and even after the recent corrections, valuations remain at frothy levels (30%-50% premium to historical average).

These stocks have been in correction mode for almost five months with a lower top and lower bottom formation unlike previous corrections of 2-3 months and sharp recovery thereafter, which indicates weak structure. Many PMS has started seeing redemption which could have a contagion effect on the small-cap space in the coming months.

What would be your advice to retail investors given the current situation?

Irrespective of market cycles, investors have been to maintain asset allocation as per his risk-profile. Valuations are neither too expensive nor too cheap. This is the time to have a neutral asset allocation in the equity portfolio. Markets may not give spectacular return like last year. If you are investing in the market, then invest with a five or ten years. Also, we would advise investors not to run a leveraged position in equity at this stage of valuation.

Is the stock market overvalued? What are the major triggers behind it?

Since we believe this is a stock-specific trading market, so one should not bother much about valuations. Unfortunate scenario is that macros don’t look as rosy as they ought to be. Some political uncertainty could take place with some large state polls this year and the Lok Sabha elections next year. Apart from this major uncertainty, rising crude prices, weakening currency and global economic tariff wars are some of the big factors, which could topple the cart for equity investors during the year.

We recommend investors not to expect any big gains in 2018 and to use the year for building their equity portfolio, as they would get multiple chances for the same. Over the last three-four months emerging market currencies, in particular, have been pretty weak vis-à-vis the dollar. Currencies of countries like Brazil and Turkey have taken a big beating. As we speak, there is a concern about trade wars between the US and China and therefore the Chinese markets and the Hong Kong markets are taking a beating and which could sentiments of our markets too.

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