Jimeet Modi, Founder of SAMCO Securities doesn’t expect fantastic returns from the small cap segment going forward. There could be some upside in the smallcap space but at this point in time, the risk-reward and the margin of safety are adverse and on the negative side, Modi said in an interview with MintGenie. Furthermore, the expert noted that volatility is likely to shoot up as we enter the high-octane voting periods for General elections.
In the small-cap segment, there are pockets of excessiveness and exuberance and investors are likely to be better off allocating the fresh capital to the other pockets of the markets rather than the small-cap segment. I wouldn’t say that the party is over in the small-cap segment, there could be some upside but at this point in time, the risk-reward and the margin of safety are adverse and on the negative side. We don’t expect fantastic returns from the small-cap segment going forward.
Volatility is likely to shoot up as we enter the high-octane voting periods for general elections which are spread over 7 phases (April 19-June 1, 2024). Volatility is likely to remain elevated till the results are announced on June 4. It’s better to reduce exposure to riskier sectors & stocks and move into safer blue-chips. One can also increase exposure to gold as it’s a safe haven asset. Gold also performs well whenever the US Fed starts cutting interest rates. With the US rate cut expected this year, we believe gold could offer protection, even after the election results are announced.
In the Auto sector, the Rural demand is going to outperform urban demand, as has been observed in the past several years. One of the reasons for this is improving road infrastructure in the rural areas. Good monsoons can also play a vital role in boosting the rural auto demand. Moreover, interest rate cuts, if any, happen in the second half of the FY25, which will lead to a reduction in auto loan costs and thereby lead to a surge in demand. All this is likely to keep auto stocks in momentum. However, one must look out for valuations as they are starting to get stretched in some stocks.
PSU banks have outperformed private banks in the last 4 years. PSU banks’ valuations are stretched currently as they are trading at their highest price-to-book (PB) value in a decade. Nifty Private Bank to Nifty PSU bank ratio is near its 8-year low. So, it won’t be surprising if private banks start outperforming PSU Banks soon.
The Nifty PSU Index has witnessed an extraordinary run over the past year and a half. However, the fall was guaranteed given the stretched valuations in many PSUs. Fundamentals were far behind the market valuations. Despite the projected deceleration in PSU stock momentum, the government's persistent prioritisation of power development, indigenous production for defence, railways, and affordable housing projects are expected to uphold investor enthusiasm in this sector.
There were pockets of overvaluation in small-cap and midcap space. Sectors like defence, railways, engineering, capital goods, and PSUs were typically running beyond their fundamentals. The recent correction in midcap and small-cap indices is a welcome relief. Large caps from the benchmark indices like Sensex and Nifty were trading at a relatively comfortable valuation and didn’t see any meaningful correction at all. The small-cap and mid-cap indices are down more than 10% in March from their all-time highs, while Nifty was down just about 2% during the same period. Thus, a correction has already occurred where it was due. Having said that, one cannot rule out a 3-5% correction going ahead in any of the three indices discussed above.
RBI was ahead of other central banks in the world when it came to taming the unprecedented rise in inflation in 2022. RBI has proved itself that it can go against the herd and make independent decisions. However, with inflation still hovering above RBI’s comfort zone of 4%, there’s little reason why it would cut rates before the US Fed.
Though the Indian economy seems to be on a stronger footing there are certain factors that are beyond its reach. This includes the possibility of global recession. If we see a serious slowdown in the US economy, though, at this moment, it appears to be a likely soft lending, but if the US plunges into a recession, and as a result, the world economy slows down, it can have its implications on India as well and the projected growth rate for the domestic economy could be at the risk.
The new investors that have entered the market recently (particularly post-COVID) have just seen an uptrend in the market in the last two to three years. They don’t know what the downtrend is and what it looks like. Though Indian markets are expected to remain secularly bullish for a longer period, there could be certain uncertainties like a negative surprise in the outcome of the general election flare-up in crude oil prices and the looming geo-political situation in addition to the one currently on. Against this backdrop, new investors are advised to diversify their portfolio among different asset classes including gold. Among Equities, looking at the current scenario, it is advisable to reduce exposure to small and mid-caps and park their money in defensive large caps till all the dust settles down post-election, till the formation of the new government.
We believe SAMCO Options B.R.O, a new feature added to our trading App, is a great platform for all Options traders. Today 9 out of 10 option traders lose money because of an unsystematic approach to trading options. Most options traders trade naked options, that is, without any hedging strategy being put in place. Most traders don't even understand the complex Greeks such as theta, Vega, etc that go into options pricing which is why we have seen that even though they may have got the direction of a particular instrument right, they end up losing money on the options side.
So, we have designed this platform called Options B.R.O. to help options traders more systematically and help them build their own strategies without having to do a lot of cumbersome work and take a more strategy-based approach to options trading which results in a better outcome. Obviously, options trading carries its own risk but a strategy-based approach with hedge strategies, is a far better approach to options trading rather than the current key practice of merely buying naked calls or puts, akin to buying lottery tickets. We believe that this is the real game changer and we'll add a lot of value to option traders.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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