#39;Plenty of stocks in small midcap space have the potential to gain alpha#39;

Market Outlook

There seems to be a lot of fuel left in the small & midcap space as some of them are still quality, growth-oriented stocks that can undergo a re-rating in terms of valuations, Nirali Shah, Head of Equity Research, Samco Securities, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) Although it was a short week but the volatility remained high with Sensex and Nifty touching crucial resistance levels and then retracing back some gains. What led to the price action?

A) The market sentiment was mainly guided by the infrastructure stimulus of $ 2.3 trillion announced by the US President Joe Biden. The treasury yields also witnessed some pullback which led to the movement in stocks.

Indian markets were mainly stuck in a range and there weren’t any specific local macros guiding India’s benchmark indices, it was more of a volatility squeeze.

The next week will be dominated by the RBI’s MPC outcome and the expectations of Q4 results from India Inc.

Q) What is your view on the small & midcap space?

A) Small and midcap stocks were laggards for a few years pre-Covid and picked up steam only when markets switched towards value plays.

Going forward, there seems to be a lot of fuel left in them as some of them are still quality, growth-oriented stocks that can undergo a re-rating in terms of valuations.

Stock-picking will now come into play as there are certain bets which have the potential to gain alpha.

Q) Sensex could well end flat for March but 2 sectors that stood out were IT, as well as Basic Material up over 5% each. What led to the price action in these sectors? Do you think this outperformance could continue in April as well?

A) IT stocks have led the rally due to a combination of factors such as the appreciating Dollar and expected positive upcoming quarterly results. Besides defensive stocks are gaining more traction with the risks of the second covid-19 wave and lockdowns.

Indian IT companies are fundamentally strong with stable earnings growth, quality management, pipeline of strong deals, and consistent cash flows.

On the other hand, the uptick in economic activity is leading to a rally in basic materials stock. The IT sector is likely to continue this outperformance in April as well.

Q) Telecom, and Realty sector fell by about 6% in March – what led to the price action in these sectors? Do you think this underperformance could continue in April as well?

A) Realty stocks have witnessed some correction after a strong rally which is part of the game. Corrections are much needed for a healthy market rally.

On the other hand, telecom stocks have underperformed due to financial stress and companies refraining from tariff hikes. Any developments in the telecom sector will dictate its trend in April.

Q) 10-years data suggest that bulls remained in control at least in 7 out of last 10 years in April. How is April likely to pan out for investors?

A) Volatility is likely to continue in the month of April as Nifty 50 continues to consolidate in a range of 14260-14880. Any break from the immediate range can dictate Nifty’s course in April. However, we do maintain a mildly bullish outcome given the approaching result season.

Q) As we step into FY22 what would you advise investors? Sensex, and Nifty rose by about 70% in FY21 and a similar performance is unlikely in FY22.

A) The first half of this fiscal could see some volatility because of the previous year’s low base due to lockdowns and the latter half of the year might see a different picture.

Hence, the returns could be moderated on an overall basis and aren’t expected to be as large as FY21. Investors can therefore place their investments in quality economic-driven stocks which can continue to move higher.

If anything, FY21 has taught us that investors should stay invested through the thick and thins of the market as the rally can continue. Investors can keep a 5-7 years’ investment horizon to beat the volatility that the coming year can bring us.

Q) Top investment ideas for the short term?

A) RBI’s MPC meet and the Governor’s comments on the overall economic scenario will dominate the bourses in the week ahead, followed by the result season which is expected to commence for this quarter.

Investors may buy defensives such as IT and FMCG which are expected to post better earnings growth this result season.

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