There was a bit of disinterest in the mid- and small-cap stocks for the last two years because of valuation gap but now, with correction in valuations both in terms of prices and improved profits, the relative valuations of mid- and small-cap stocks are at a significant discount to large companies, said S Krishna Kumar, CIO-Equity, Sundaram Mutual Fund.
“Trade has been more biased towards hiding in companies with visibility, better quality, better balance sheets and liquidity names but with some amount of risk coming back both locally and globally, interest has come back into midcaps and smallcaps. This trend will continue and rally will get lot more broad-based,” he said, adding that growth too will be cyclical and not just secular.
According to him, PMIs in US and China are improving and India is also expected to bottom out over the next couple of months, and into the fourth quarter and first quarter, India PMI will get off into a rebound. All these things point to a broader rally and wider positioning going forward, he said.
Talking about sectors, he said with regards to pharma the play is there in domestic formulation companies. “Lot of fund allocations are moving into other parts of healthcare like hospitals and diagnostic companies. Going forward with consolidation taking place, they see emergence of large companies in hospital and diagnostic space,” added Kumar.
With regards to real estate, two years have been more favourable for large players post demonetization and RERA, while funding for smaller players have been a challenge because of liquidity tightening, said Kumar. Sundaram MF prefers to look at players in micro market and cities rather than taking a holistic approach. The house like players in Hyderabad, Bengaluru that are well-placed from a longer-term perspective, he said.
“We are playing the real estate space through ancillaries like plywood, pipes, fittings, ceramics and building interiors and paints,” he said.