Valuations still elevated in mid & small caps, more correction needed: Ajay Tyagi

Time of India

9 hours ago

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In this edition of ETMarkets Smart Talk, Ajay Tyagi , Head – Equity and Fund Manager at UTI AMC , shares his insights on the current market landscape.He believes that while valuations have moderated from last year's highs, mid and small caps continue to remain overheated and may require further consolidation or correction before becoming attractive.Tyagi also weighs in on tariff concerns, earnings downgrades, retail flows, and why the consumption sector could be on the cusp of a cyclical revival. Edited Excerpts –A) Our opinion is that this may not be the final tariff that will be imposed on India. There may be further negotiations between the two countries which may eventually lead to a number that should be closer to tariffs imposed on other countries.If the final tariff differential between India and other competing countries is within a band of +/- 5 percent then it may not alter India's competitive advantage, however, anything beyond this will have to be looked at on a bottom-up basis.A) Usually, alpha generation gets difficult in a bullish market as everything goes up indiscriminately and often unwarrantedly.This makes it difficult for fundamental based investors to generate alpha as they are unable to participate in stocks and sectors that are predominately going up on account of momentum or narratives.When markets start to witness consolidation, the froth in the market starts to dissipate and price movement are more linked to fundamentals, making it a fertile ground for managers to create alpha. We feel that we are entering one such phase.A) June quarter results have just about met the weak expectations. Nifty 50 earnings for the quarter would end up being in high single digits, which means that full year earnings' estimates for the current fiscal will have to be adjusted downwards.Consumer sentiment across sectors still remains weak, although we are expecting a revival during the upcoming festive season.A) While valuations have corrected from the heavy levels of last year but they continue to remain high for most parts of the market. This is particularly true of the mid and small cap segments where overvaluation is the highest.Our view is that markets have to consolidate for some more time or correct from the current levels to get into the attractive zone.A) FIIs have the ability to compare valuations across different markets and then make a decision on relative risk-reward. This favourable / unfavourable risk reward is a big determinant of their flows.Given that Indian markets are trading at a historically high premium versus other emerging markets, there may be better opportunities outside India.Apart from the valuations for the Indian markets being high, there doesn't seem to be any other factor that should keep investors worried.The Indian economy remains in a strong position and while the markets may remain sideways for some more time, this should not be a cause of concern for long term investors.A) Flows from retail investors have stayed high over the last few years and this has certainly supported the markets.However, we cannot rule out a moderation of these flows, particularly because most retail investors are backward looking and poor historical returns can play on their minds and prompt them to slow down their investments.While structurally flows from households into Indian markets will continue to rise in the fullness of time, we do not rule out a cyclical slowdown in flows in the coming quarters.A) Usually retail investors follow the trend, therefore, if markets start to correct, it won't be surprising to see flows weaken. However, we advise investors to be contrarian and increase exposure into equities, should there be a correction.A) We find the consumption sector to be attractive, particularly consumer discretionary and consumer durables.While consumption growth has been weak over the last couple of years, our view is that we should start to witness cyclical recovery in consumption trends.There are also some supporting factors to drive demand like Income tax break given by the government in the budget and the upcoming 8th pay commission. Lower inflation and interest rates may act as further drivers for consumption demand.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)