Dalal Street Voice: We advise investors to approach small & midcap space with caution in 2022: Vinay Paharia of Union AMC

Vinay Paharia, Chief Investment Officer, Union Asset Management Company Private Limited is of the view that small and midcap companies are trading at premium valuation compared with their large-cap peers and hence we would advise investors should approach this segment of the market with caution. Edited Excerpts:

Q) The year 2021 was a good year for the markets with gains of over 22%. What is your view for the markets in 2022?

A) We have witnessed brisk economic growth in the last couple of quarters driven by pent-up demand. According to us, the medium-term economic growth is likely to be moderate and is expected to revert to the historical rate of growth.

We expect moderate growth in the Fair Value (FV) of Indian companies in the medium term. However, the markets are trading at a valuation that is at a premium to its current Fair Value and we believe that we have borrowed some returns from the future.

Hence, we remain cautious in the near term but are optimistic over the medium to long term.

Q) The US Fed signs 3 rate hikes in 2022 – how will it impact Indian markets, bonds and currency?

A) Interest rates act like gravitational force on equity and bond valuations. In Bonds, for a given coupon rate and tenure, if the expected interest rate increases, bond prices fall.

Similarly, for equities, any increase in expected long-term interest rates results in a fall in valuations. Hence, we remain cautious of near-term returns in the Indian equity markets.

Q) What are your expectations from the Union Budget 2022?

A) We expect a continuation of the Government’s long-term policies and reform agenda.

Q) Small & midcaps indices have outperformed other market representative indices. Do you see similar growth in 2022 from this space?

A) We think 2021 was a bumper year for equities, as the valuations swung from fair to moderate overvaluation. The Fair Value growth in corporate India has been moderate in the year.

We do not expect a repeat of such a re-rating of markets in the forthcoming year. In our assessment, small and midcap companies are trading at premium valuation compared with their large cap peers and hence we would advise investors should approach this segment of the market with caution.

Q) Which sectors are likely to hog the limelight in 2022?

A) We are bullish on Information Technology, Telecommunication and Industrials. We feel that the pandemic has improved the business potential in some of these sectors.  

We expect the future fair value growth for these sectors to be strong and find valuations reasonable.

We are underweight in the Materials and Utilities sectors as we believe that the risk-reward is unfavorable for these sectors.

Q) Any sector that could turn out to be a dark horse of 2022?

A) If consumer sentiment improves and the pandemic subsides, we expect the consumer discretionary sector to be a dark horse for 2022.

Q) What are your views on markets in terms of earnings recovery in 2022, as well as valuations when compared to global markets?

A) According to us, the medium-term economic growth is likely to be moderate and is expected to revert to the historical rate of growth. Similarly, we expect moderate growth in the Fair Value of Indian companies in the medium term.

Q) What are your views on IPOs hitting D-Street? Do you think that there is the general expectation that IPO is equal to quick money? How should investors look at investing in the IPO?

A) We need to evaluate each IPO just like any other stock listed on the exchange. If it’s a good business, run by good management, and is priced at a reasonable valuation, then it may be an attractive investment for the medium to long term.

However, an investor should not invest in any company with an expectation of quick gains, as that would be tantamount to speculation, which reduces the probability of success.

Q) It has been an exciting journey for retail investors, who joined the D-Street party recently (1.8 cr Demat accounts as on October 2021). Clearly, there is a rush from retail investors to invest in equities. SIP flows surpass Rs 11,000 cr. What trend do you foresee for 2022?

A) There has been an increase in the participation in markets by retail investors, as the proportion to domestic savings invested in equities, which was historically low, is now increasing.

We expect this trend to continue over the long term, as the financialization of domestic savings is a sustainable megatrend in India.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)