Balanced portfolio strategy is key while making equity investments. Mid & smallcap stocks offer opportunities

A balanced portfolio strategy will help investors capitalise on the various pockets of strong earnings recovery and outlook, according to a report by Tata Mutual Fund.

The report recommends investors increase exposure in mid and small-cap stocks to capitalise on investment cycle-led economic recovery. For April 2023, the mid-cap and small-cap indices outperformed large-cap and were up by 6.2% and 8.5%, respectively.

At the same time, investors should actively seek GARP (Growth at Reasonable Price) opportunities on a bottom-up basis, the Tata MF report said further. This means investors should look for value along with triggers and an earnings upgrade cycle.

The report emphasises on valuation discipline, which is key in a high interest rate regime.

Themes for investment:
Financials: High Credit Growth, margin expansion and lower NPAs imply strong earning momentum and positive surprises for the sector, including mid and small-sized banks (trading at early cycle valuations) where Tata MF has increased exposure.

Capital goods/Industrial sectors: Recovery in the investment cycle led by healthy cash flows in the corporate sector and the government’s countercyclical fiscal policy makes us incrementally positive on the industrial/capital goods sector leading us to progressively increase the exposure to this segment,” the report said.Consumption: Sectors with topline risk (e.g. IT, FMCG) have stabilized; margins will be supported by lower input costs or easing wage pressures. Urban consumption after significant growth in 2022 is slowing due to the impact of inflation and interest rates. In contrast, rural consumption is picking up, albeit gradually and the monsoon will be key to sustaining the recovery.

Caveats
IT Sector: The report remains ‘Underweight’ on the IT sector amid global uncertainties which are likely to prevail over the next six months. Though an increasing number of companies are seeking digital solutions, IT spending has gone up structurally, the report said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)