ETMarkets Smart Talk: FIIs are also exploring opportunities in small- and mid-cap space: Ramkumar K

In an interview with ETMarkets, Ramkumar said: “I.T. and financial services have not done well in a recessionary scenario. We will be cautious on the same” Edited excerpts:
We have recovered smartly and are down in single digits from all-time highs. What is your take on markets?
The markets may continue in a narrow range due to a lack of direction from the Central Banks on the interest rates. The challenges will continue to emerge for equities.

Sheer economic challenges may bring inflation down, and, in turn, will force Central Banks to hold and reduce rates. Such an economic scenario does not favour equities and corporate earnings.

We do not see permanency in this recovery. However, it may move sideways for a couple of quarters. The soft commodity prices and the higher bond prices do not share the same optimism on the economy as that of equities.

FIIs seem to be returning to India – the selling quantum has gone down. What is leading the change?
We do not think the change is permanent and we shall see the selling return depending on the opportunities other markets provide.

Since there is a good run on the global markets in recent months, the buying we see is due to the tactical allocation of funds into emerging markets including India.

Currency stability and oil price behaviour are two other crucial elements that will influence the extent of FPI participation.

Which sectors are looking to take the lead in FY24?
Consumer staples look good as they operate in the essential category and have seen a peak in raw material costs in the past.

With the Government’s focus on infrastructure, capital goods shall also continue to see good orders and earnings.

BFSI sector looks interesting with strong Balance Sheets and valuation correction in the private sector banking space as compared to their growth in the last two years driven by significant earnings growth.

The only challenge in the BFSI sector is multiple segments, over public ownership, and plenty of stocks.

FIIs have increased their stake in small & midcaps in the March quarter. Small and midcaps underperformed in FY23 – what is fueling the optimism?
Due to a significant correction in small caps and to some extent in mid-caps in the financial year 2023, some segments have started looking attractive.

In some cases, extreme corrections have pushed stock prices into high single-digit and low double-digit valuations which make them compulsive from the long-term P/E average principle.

FIIs are also seeking opportunities in equity investments and small- and mid-cap space corrections have grabbed their attention.

Which pockets should investors avoid in FY24? Which sectors/themes is(are) looking expensive?
I.T. and financial services have not done well in a recessionary scenario. We will be cautious on the same.

Where is the next set of wealth creators will come from?
Wealth creation is always a bottom-up approach. Companies have contributed to creating investor wealth even within sectors where all the companies have not participated. The focus on identifying individual stocks within the sector will continue.

What is your current assessment of the March quarter earnings season?
Earnings shall be good considering the tailwinds coming in the raw material cost, power and fuel. The extent of high-cost inventory carried over from the earlier quarters is unknown.

The market is more focussed on the future commentary on the volume growth and top-line outlook.

How should investors play new-age stocks in FY24? (Zomato controversy) What can change fortunes for some – is it the profit, growth, or margin outlook?
The froth and irrational multiples have now been corrected. Though many of the companies may continue to be EBIDTA negative, markets will be looking forward for the good ones to show improvements every quarter and be directionally right towards the profit objective.

We have seen traces of re-rating and incremental buying in some of the new generation stocks, including from some FPIs. They have contributed to pulling up the stock prices significantly from their annual lows.

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