“Investors need to be very selective if they wish to continue to invest in smaller companies,” says Yogesh Nagaonkar, fund manager, Bonanza Portfolio Management Services. He suggests that investor should look at individual companies, its competitive advantage and then the sector rather than the other way round. He feels there’s still attractively valued companies in plastics, forging and construction.
For mutual fund investors, the core of the portfolio always needs to be diversified funds. The exposure to mid- and small-cap funds should be restricted to 30-40 per cent of the equity portfolio. They should continue their systematic investment plans not worrying about the market valuations and fund managers will take suitable calls on their behalf.
Recently, Kotak Institutional Equities came with a report that said: “We find valuations of several mid-cap. stocks in our coverage universe very high. In fact, it would not be wrong to say that some are in the bubble phase with the market extrapolating strong growth and high returns in perpetuity.” The brokerage feels that some companies do have certain strengths but their valuations are absurdly high especially those in semi-branded (semi-commodity) space. The report gives a list of 19 stocks including in the segment including Amara Raja Batteries, Dalmia Bharat, Shree Cement, Crompton Greaves Consumer, Cera Sanitaryware, Greenply Industries, Voltas and Whirlpool.
Investment managers feel that there is a bubble because to justify the current prices, these companies will need to grow their earnings multiple times in the next two years. But with economic growth, industrial production and credit growth stagnant, it doesn’t seem possible. In fact, DSP Blackrock stopped taking fresh inflows in one of its best-performing funds DSP Blackrock Microcap Fund after the sharp run-up in mid and small-cap shares.
Experts say that smaller companies continue to lure investors as many believe that stock markets are poised for a bull run. Many believe that Bhartiya Janta Party will be re-elected at the Centre in the next general elections after its victory in Uttar Pradesh. The expectation of a stable government is giving hopes to many investors.
Outperformance may not sustain