ETMarkets Smart Talk| Smallcaps in oversold zone; likely to outperform in next 12 months: Naveen Kulkarni

After a sharp rally in the second half of August, investors are now eyeing fresh opportunities beyond largecaps. With inflation easing, rate cuts in place, and system liquidity improving, the market backdrop has turned supportive.

Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, believes smallcaps—currently in an oversold zone with attractive valuations—are poised to deliver strong returns and could outperform over the next 12 months.

In this edition of ETMarkets Smart Talk, he shares his views on GST reforms, global cues, sectoral opportunities, and why growth could emerge as the winning strategy for investors. Edited Excerpts –

Q) Thanks for taking the time out. What a swift rally we have seen in the second half of August. What is fuelling the rally on D-Street – GST reforms, trade pacts?
A) The markets have been buoyed by the positive construct from an economic perspective. Inflation has come down significantly, rate cuts have been implemented, and system liquidity has improved.

Corporate earnings for the quarter were reasonable, with no serious downgrade in earnings. The market is in a slightly oversold zone and backed by reasonable valuations. Risks for further earnings downgrades have reduced materially.

Moreover, the government is pushing ideas to boost consumption growth. Thus, some relief rally in the market.

Q) If GST reforms do kick in – do you see consumption as a basket to produce next set of wealth creators? Or are there more sectors?
A) This is likely, but it will depend on the quantum of benefit. The traditional FMCG sector may not benefit much from the reduction, but discretionary consumption could get a boost if serious cuts in the GST rates get implemented.

Q) What is your take on Jackson Hole speech of US Fed – Jerome Powell? It is probably Jerome Powell last speech.
A) The markets have been strengthened by the possibility of rate cuts in the Western world.

The imposition of tariffs was expected to fuel inflationary pressures, but those challenges seem to be receding now. Also, the possibility of a rate cut is a serious kicker for the markets worldwide.

Q) It is first where India got upgraded and we saw a downgrade of US by Moody’s back in May. What does it suggest?
A) India’s credit rating upgrade was long overdue, and it has taken considerable time for it to happen.

Therefore, the upgrade was anticipated. Given the strength of the Indian economy, it is likely that India’s credit rating will improve. The US economy is facing challenges with mounting debt, yet it continues to grow.

Therefore, a rating downgrade was also expected. Overall, these are very different events, as India’s credit is still significantly lower than the intrinsic strength of its economy, while the US’s rating is still very high considering the debt challenges that the country is facing.

Q) Which sectors should one look at amid GST reforms, trade talks, etc.?
A) Autos and Auto Ancillary, Hospitality, Travel and Discretionary spending related sectors should be the key focus area. In the current environment, domestic consumption-oriented sectors, including BFSI, should be the focus as well.

Q) Do you think there are sector(s) in which the story is already played and one can look at bringing down their exposure?
A) Most sectors are at reasonable valuations. Also, broadly, the last one year has not been standout for any of the sectors.

We have seen sector rotation plays happening at a fast clip but we have not seen serious rallies which has resulted in frothy valuations, and we need to be concerned.

Q) How should one play the small & midcap space?
A) India VIX is now down significantly, and typically, this zone helps the rally in small and midcap spaces. The small cap space is also in an oversold territory and valuations are very reasonable.

Over the next 12 months, the small-cap space could see good returns and is likely to outperform the broader market.

Q) We are seeing FII money moving from largecap to small & midcaps? Can we say that smart money is targeting ‘growth’?
A) Yes, this is very likely as there is value in the small and mid-cap space. Also, growth has become scarce now and the large caps are getting stuck in a low growth trajectory, even though they offer good value and liquidity. Thus, small and midcap investing is clearly growth investing.

Q) Between value and growth it looks like growth stocks will emerge as winners?
A) Growth is likely to see better allocation over the next 12 months and could emerge as winners. As indicated earlier, growth is scarce and value is more widely available. Thus, the market is likely to chase growth, and it could emerge as a winning strategy.

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