“Many of India’s large caps are overvalued,” said Sunil Singhania, founder of Mumbai-based Abakkus Asset Manager LLP. “Most of them are unlikely to grow at the rate expected of them.” Abakkus has about 75 per cent of its $300 million in assets invested in small and medium-sized stocks. The firm earlier this year said some quality stocks are likely in a “bubble zone.”
Investors have taken shelter in some of the South Asian nation’s biggest companies amid a credit crunch and the slowest economic growth in six years. That’s added to an extended underperformance by small stocks that goes back to 2017.
Still, Chandresh Nigam, who oversees $14 billion of assets at Axis Asset Management Co. isn’t convinced there’s value in small caps. It is worth paying more for shares of high-quality businesses, he said in an interview last month.
Quality can be expensive, with the Sensex
trading at 19 times 12-month blended forward earnings. That’s close to a level that’s proved the ceiling for gains in the past few years.
Yet, the bet has paid off for Axis, with the money manager’s largest equity fund beating 96 per cent of peers in the last five years.
For market breadth to widen, economic outlook needs to improve. Analysts at Goldman Sachs predict the growth is set to return. High valuation has partly priced in the expected recovery, with the MSCI India Index trading at 1.2 standard deviations above its 10-year mean, they wrote in a note.
There are signs investors are warming up to mid-cap stocks. The Nifty Midcap 100 edged out the benchmark index since the start of October, rising 6.3 per cent versus a 4.8 per cent gain for the NSE Nifty 50 Index.
“Early signs point to a change in market undercurrent,” Navneet Munot, chief investment officer at SBI Mutual Fund said in a note on Tuesday. “‘Value stocks’ have significantly outperformed ‘quality’ over the past two months.”