Indian markets: Small and largecaps attractive, midcaps require caution: Aniruddha Naha

“The macro fundamentals look to be very strong out here. And financials as you pointed out, I think so that is one space where there is reasonable amount of opportunity to build a good long-term portfolio and valuations are quite reasonable out there. So, remain positive on markets, remain positive on financials,” says Aniruddha Naha, PGIM India AMC.

Firstly, help us with your take on the markets because the last week has been quite an eventful week for the Indian markets. We finally managed to break out of the range and not just that it was the big RBI bazooka as well. I am sure you must also be liking the financial space, but what is your overall take on the markets right now?
Aniruddha Naha: So, we have continued to remain positive. I mean, we turned positive somewhere in the month of February, March and our view is whether it is short-term, medium-term, long-term, we remain reasonably positive on markets. Because the smallcaps have seen a reasonable amount of rally of almost 20%, can there be a pullback? There can be. But over the period of time, I mean, into the next couple of years, three years, it is a good time to build portfolios.

The macro fundamentals look to be very strong out here. And financials as you pointed out, I think so that is one space where there is reasonable amount of opportunity to build a good long-term portfolio and valuations are quite reasonable out there. So, remain positive on markets, remain positive on financials.

Well, yes as far as the positive momentum is concerned for the market, we do see a lot of positive news coming in as far as the inflows are concerned, the FIIs have already bought $1.7 billion of inflow in the month of May and the DIIs have bought $7.9 billion. Also, looking at the SIP numbers that are sitting at all-time highs, there is still that positivity in the market. We have been very-very range bound. But from here on, when we move up like you said you are very bullish on financials, but given that the FII flows might return to India specifically after the rate cuts, do you see the largecap basket benefiting from that?
Aniruddha Naha: See, our sense is FIIs as you mentioned is at about 16% ownership. This has very little downside and incrementally as fundamentals for India look comparatively far-far better than what we see in a lot of other markets, invariably you are going to see FII flows coming into India. Will it be towards only largecaps? Yes, largecaps have that liquidity space to accommodate more money, but whenever that happens even domestic investors get positive and that is where you will see the HNI families, the family offices, even retail coming back and that will fill into the midcap, smallcap, microcap.

So, yes, the initial rally on the FII side could lead to a largecap rally out there, but we continue to believe that money will flow to places or segments of market where valuations are reasonable. And we see valuations especially in the small, microcap space and the largecap space to be reasonably good. It is only the midcap where we will have to wait and see how things play out given that valuations are a little steep out there.

Help us with your sector preferences as well. Any sector you believe is at an inflection point because we just got done with the earning season as well so any sector which looks promising to you right now?
Aniruddha Naha: So, a few sectors which get linked, one is the rate cuts and the liquidity that has come in will definitely see financials participating especially the NBFC segment and probably a quarter or two quarters down the line even the MFIs, their asset quality gets addressed and that will flow through. The second thing as you have got liquidity and your cost of capital goes down.

The capex cycle or the investment-oriented businesses, investment cycle oriented businesses do very well over a period of time. So, cap goods will be the second part and third part is consumption because consumption was subdued, but this time around the rains seem to have taken off reasonably well, you have got tax benefits come through on the consumption for taxpayers and the rate cycle seems to be on the lower side, so from that perspective, discretionary consumption would be the third area where we would be extremely positive about how things will play out.