 |
|
Jigar Mistry's analysis highlights the recent correction in the smallcap market as an opportunity arising from the extraordinary wealth generation post-COVID, particularly among retail investors. The article underscores the unsustainable growth trajectory of smallcap stocks, fueled by excessive retail participation. Mistry notes that the earnings growth of the smallcap index was around 16-17% CAGR over the past three years, while share prices surged at a rate of 25% CAGR per year, creating a 10-12% alpha. This divergence was largely attributed to the influx of retail money, which ballooned from 16 lakh crores in March 2020 to 67 lakh crores by September 2024. The concentration of wealth generation within a small segment of active Demat account holders (two to three crore) who accumulated 50 lakh crores, predominantly from small and microcap stocks, amplified the effect. This led to a belief that smallcap investing was the only sustainable wealth-generating strategy, driving further inflows into illiquid stocks and causing a significant dislocation between EPS and share prices. The correction, according to Mistry, represents a necessary recalibration. He indicates that the cumulative share price is now only 10% higher than earnings growth, suggesting that much of the excess has been purged. He cautions against expecting the market to simply stop at equilibrium, suggesting a potential overshoot that could create further buying opportunities for the next rally. Mistry pointed out a conspicuous shift away from capital expenditure towards consumption-oriented spending. The central government's allocation of one lakh crores away from capex signals a change in priorities. Analysis of state budgets from the 12 states preceding the Delhi elections revealed a similar trend, with capex totaling 4.3 trillion INR and social spending/freebie budgets at 3.1 trillion INR. This shift from the previously high growth of state-centre PSU CapEx (around 30% per annum for the past three or four years) necessitates a reevaluation of investment strategies. The budget's assumption of 35% growth in capital gains tax and underlying personal income tax is considered unrealistic. A shortfall in tax collection (estimated at 1.5 to 2 lakh crores) could lead to either reduced capital expenditure at the central level or increased disinvestment, as RBI dividends are already maximized. This would negatively impact stocks associated with the capex narrative, such as railway, solar, and renewable energy companies, requiring further correction for them to become attractive. Conversely, the increased focus on consumption benefits a broader range of businesses, albeit with potentially lower velocity. Mistry's firm has adjusted its stance to favor consumption, recognizing the altered economic landscape.
Regarding the banking sector, Mistry emphasizes that it remains an attractive investment despite concerns about slowing Net Interest Margins (NIMs), deposit scarcity, and marginal asset quality deterioration. He argues that investors are overlooking the relatively low valuations of these businesses. While earnings growth may moderate from 25% to 15%, current stock prices are discounting a significantly lower earnings growth rate of 7-8% based on a reverse Discounted Cash Flow (DCF) analysis. This undervaluation led Mistry's firm to maintain an overweight position in the BFSI sector, allocating nearly 40% of its exposure to it by January. The shift from small and midcaps into larger cap businesses has been a deliberate strategy over the past six to seven months. In May 2023, the firm's exposure to small and midcaps was approximately 63%. As of the time of the interview, smallcap exposure had been reduced to around 25%. Larger caps and cash now constitute the majority of the portfolio, reflecting a more conservative and defensive positioning in anticipation of the market's challenges. He also touches upon the impact of open architecture, which threatens some businesses more than others. Therefore, one needs to be positioned in businesses that are relatively less impacted by the open architecture, banca versus select etc. The confusion around the Budget has been duly noted and taken cognisance of. At the end, the penetration of insurance in India can only potentially move up and that is the reason why we have increased the weights as the markets kept on correcting these stocks and we are reasonably positive on most of them.
In summary, Jigar Mistry presents a comprehensive analysis of the current market dynamics, emphasizing the importance of adapting investment strategies to the changing economic environment. He argues that the smallcap correction presents opportunities, highlighting the shift from capex to consumption and the undervaluation of banking stocks. The firm's strategic reallocation of assets towards larger caps and cash reflects a cautious approach, while maintaining a selective focus on sectors and businesses with long-term growth potential, such as insurance. His insights underscore the need for investors to carefully assess valuations, earnings growth prospects, and the broader macroeconomic factors influencing market performance. He cautions against extrapolating past successes into the future, particularly in the smallcap segment, and encourages a more nuanced and risk-aware approach to investment decision-making.
Source: Smallcap correction will create new opportunities in market: Jigar Mistry