Small and midcap segments are trading at premium valuations, says Vinay Paharia, chief investment officer at PGIM India. Paharaia tells Nesil Staney some low- quality stocks are trading in a bubble zone. Excerpts:
How do you read the market?
We think there is a big multi-year investment opportunity in investing in a diversified portfolio of high growth and high quality stocks. This segment of the market has delivered outperforming performance over last 5-year and 10-year periods. However, in the period from April 2023-June 1, 2024, firms which had high growth and high-quality businesses have significantly underperformed those that have low growth and low-quality businesses. In this period, within the NSE 500 firms, the broad underperformance of these high growth, high-quality firms is to the tune of 35%. So, that makes us optimistic because such firms have underperformed, despite growing at a faster pace.
What are your concerns?
Part of the slowdown in FY25 was contributed by inclement weather conditions and some part due to slowdown in government spending due to elections during the first half. Even early trends and management commentary from Q4FY25 results are not inspiring for domestic economy. Due to this weakness in macro, earnings estimates are likely to be revised downwards, increasing market volatility. However, while it is difficult to predict near term trends, medium to long term outlook for our equity markets remains healthy, driven by robust GDP growth over similar period.
Which sectors will benefit most from the China plus 1 strategy? How are you playing this theme?
We are optimistic on contract manufacturers in pharma/electronic and other manufacturing sector, which we think could be a big beneficiary of the supply chain diversification by American companies. The Indian government is also encouraging this sector through the PLI scheme, thereby improving its economic attractiveness.
Other sectors which you like?
We are optimistic on healthcare, telecom, consumer discretionary and private banks. Some of the themes we are positive on include quick commerce, online food delivery, organised retail, many internet based businesses, contract manufacturers in electronics/pharma and other manufacturing sectors, hospitals, etc.
While bubbles can be identified, how do investors know their duration?
We think that the market is valued at rich multiples compared with historical averages though large caps appear to be reasonably valued. Small & midcap segments are trading at premium valuations with low-quality and low growth stocks in a bubble zone and high growth & quality stocks trading at reasonable valuations.
What is your outlook on policy rate cuts and how are your debt funds positioned?
Our fixed income team expects a 50 bps rate cut by next year. Hence, we are overweight longer duration in our products which allow us this flexibility.
Are there any sectors with low management quality?
We have seen both good and bad quality of management across sectors, as this is more of a human trait and has got very little to do with underlying business dynamics. However, we have generally seen poor quality businesses in commodity oriented sectors.
Your future new fund offerings?
We are planning to complete our bouquet of product offerings over time. In the near term, we intend to launch a Multi Asset Fund.