Wait for Q2 results to enter stock markets; smallcaps, midcaps may outperform in near term | Interview

The volatility in the Indian share markets continues to persist, with the BSE Sensex hovering around 39,100, and Nifty 50 testing 11,550. From March lows, headline indices have rallied over 50 per cent, but are still 7 per cent down from record-high levels. Naveen Kulkarni, Chief Investment Officer, Axis Securities, advises short-term investors, who have been waiting for more correction in the markets, to wait till July-September quarter earnings. In an interview with Surbhi Jain from Financial Express Online, Kulkarni said that even if markets do not correct post second-quarter earnings, the results will provide clarity on future prospects. In the latest ruling, SEBI mandated multicap funds to invest at least one-fourth of their corpuses each in large-caps, mid-caps and small-cap stocks. Kulkarni sees this ruling as a catalyst for smallcap and midcap stocks.

1. Investors have been waiting for correction in the stock market, is it a good time to enter now?

It depends on the investment horizon, for long term investors timing the market does account for a significant portion of returns, while for short term investors timing is everything. So, from a perspective of short term investors, it might be prudent to wait for Q2FY21 results before entering the market as post results, the market could present significant opportunities. Even if the market does not correct significantly post Q2, a clarity on future prospects could mean better risk to reward ratio.

2. Is the surge in midcap and smallcap indices justified given the SEBI ruling and then the clarification?

We have been bullish on small and mid-caps for a while now as these categories have been underperformers since 2017. The SEBI ruling has become a catalyst for mid and small caps to perform well. In this environment, the mid and small-cap stocks are likely to outperform as the multicap category in the mutual funds will have to rebalance, and more buying in the mid and small-cap space is very likely in the future.

3. What are your preferred sectors amid market volatility?

Our preferred themes are Agrochemicals, Specialty chemicals, Pharmaceuticals, Digital services, Rural, Consumer Staples, Telecom and Automobiles. These are some of our top preferred sectors at this juncture where we continue to see the value.

4. Post SC verdict on AGR dues, what are your views on the telecom sector?

The telecom sector will continue to be one of the top-performing sectors. The near term survival of Vodafone-Idea is not at stake now but its long-term challenges are significant. The sector needs to hike prices significantly to build a long-term case for sustained returns. At this juncture, pricing challenges are significant and need to be addressed. This has become a critical aspect of the telecom sector.

5. How long do you see mid-, small-caps outperformance to continue? What is your near to medium term outlook?

There is no straight forward answer to this question but the outperformance can be long-lasting considering the long period of underperformance. In the near term, it is more likely that small caps and mid-caps are likely to outperform.

6. By the end of the year, where do you see BSE Sensex and Nifty50? What are the key risks going ahead?

We have a December NIFTY target of 11,300 which we have maintained at this juncture. We do not see significant upside for the NIFTY 50 index but the broadening of the market is more likely to result in mid and small caps outperforming.

7. Some of the penny stocks from the infra sector have surged up to 300% YTD, do you see more stocks which have the potential to become multibaggers?

We do not believe in penny stocks. Very few tend to be real business cases but most have their own set of challenges which are difficult to surmount. Hence, in the near term because of market liquidity we might see penny stocks doing well but historically more people have lost money than the ones who have made money in penny stocks.