Invest in mid and smallcaps with a time horizon of 18-24 months: Kotak Mahindra AMC

The Nifty Midcap index is now trading at valuations that are similar to or marginally lower than the levels seen in 2014, Shibani Kurian, Senior Vice President and Head of Equity Research, Kotak Mahindra AMC said

The emphasis should be on choosing those names that have strong balance sheets and return ratios with sound management quality. However, one has to be mindful of near-term volatility and hence investments would need to be made with an 18-24 month time horizon at the least, Shibani Kurian, Senior Vice President and Head of Equity Research, Kotak Mahindra AMC, said in an interview with Moneycontrol’s Kshitij Anand.

Q: Due to lack of any additional triggers, do you think the geopolitical concerns are likely to add further volatility in markets and cap upside?

A: When we look at 2019, it is likely to be a year of two halves. In the near-term, over the next 2-3 months, it is likely that the global and domestic uncertainties will weigh on the markets in India resulting in a period of volatility.

This would stem from the possibility of global growth slowdown especially in the case of China and the US, uncertainties over US-China trade wars, the outcome on Brexit and national elections in India (scheduled in March/April 2019).

However, after the near-term volatility, we do believe that the markets would then shift focus on fundamentals and valuations. The pace of improvement in domestic earnings growth would assume importance for the remainder of the year.

Here, we do believe that earnings growth improvement would be visible moving into FY20E (in the range of around 16-18 percent), which in turn would be supportive for valuations on a relative basis within the emerging market pack.

Q: Do you think most of the stocks that have corrected have bottomed?

A: The broader markets in the last one-year have corrected far more than the Nifty. In fact, the Nifty Midcap index is now trading at valuations that are similar to or marginally lower than the levels seen in 2014 wherein the first legs of the midcap bull-run started.

In this environment, the opportunity is presenting itself in terms of selective investment in some of the high quality -high growth midcap names that have witnessed correction.

The emphasis should be on choosing those names that have strong balance sheets and return ratios with sound management quality. However one has to be mindful of near-term volatility and hence investments would need to be made with 18-24 month time horizon, at the least.

Q: How should value investors filter stocks that have seen a double-digit fall in the year 2019 especially from the mid and small-cap space? And, is this time to pick value stocks?

A: After the fall in the mid and small-cap space, there is some opportunity for bottoming-up stock picking over the next 18-24 month time horizon.

Here as mentioned above, it is not only about valuations. The focus should be on those names that have scalable and strong business models, those with strong balance sheet characteristics, low leverage and improving return ratios and last but not the least, sound and stable management.

Q: What is your take on cases of promoter pledging and what is your advice to investors?

A: When investing in stocks, it is important to take note and be mindful of the level of leverage both at the company level as well as the promoter level in terms of the pledged shares.

Balance sheet strength should be a pre-requisite while investing in a company irrespective of the valuations that the company is trading at.

Q: Most of the investor portfolios are bleeding and I have come across a lot of people who have sold their MFs and turned towards FDs. What would be your advice to them?

A: Investing in the equity markets is not for the short-term and at times investors would have to contend with market volatility. Remember, that time in the market is far more important than timing the market.

Therefore, the longer one stays invested in the market, the better is the probability of superior returns over other asset classes.

We recommend that investors stick to their asset allocation plans and invest in the equity markets on a systematic basis with a long-term investment horizon depending upon their own risk-return expectations.

source: moneycontrol.com