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'Some Cooling-Off In Small Caps'

April 03, 2024 10:44 IST

'More than investors, fund houses, and advisors have raised caution and limited flows on small-and mid-caps.'

Illustration: Uttam Ghosh/

Markets have seen a volatile few weeks as investors dumped mid-and small-cap stocks amid concerns raised by regulators.

Pramod Gubbi, co-founder, Marcellus Investment Managers, tells Puneet Wadhwa/Business Standard that given the macroeconomic strengths, the market is pricing in reasonable earnings growth and hence justifying current valuations.


Do you think foreign flows into Indian equities will thin in the remaining part of 2024 as China and Japan become more lucrative options?

Whilst we look at foreign money as a block, foreign portfolio investors (FPIs) come in various shapes and forms -- with different mandates and time horizons.

At one extreme would be the hot money which is largely driven by rates.

However, the surprising strength of the US economy and lingering supply-side risks to inflation have meant that rate cuts are less imminent than was thought to be; hence we are seeing a bit of a pullback or slowdown. So, developments on the rate cycle will determine these flows.

At the extreme is the patient long-term capital/investors, which is/are looking at India with great interest due to a combination of absolute and relative factors.

Given the revival of India's macroeconomic fortunes and relative disappointment with China will likely be a positive driver over the medium-term.

The only hurdle for long-term capital has been valuations. So, a market pullback might actually trigger these flows.

Are rate-cut options in the US and India completely off the table as things stand?

You can't say they are completely off. Both the US and the Indian economy have been strong enough not to necessitate any monetary policy boost for growth.

Geopolitical events have meant that supply-side risks remain for inflation.

So there is no compelling reason for a rate cut yet. But if the risks to growth play out (and there are a few) and inflation risks subside, rate-cut options will be back on the table.

IMAGE: Pramod Gubbi.
Photograph: Kind courtesy Marcellus Investment Managers

How are retail investors approaching the markets now, especially the mid, small-caps?

Going by mutual fund flows data for February, there seems to be some cooling-off in the enthusiasm for small-cap.

Whilst it is still a significant net inflow, the second derivative seems to be turning negative.

More than investors, fund houses, and advisors have raised caution and limited flows on small-and mid-caps, which seems to be the primary factor at play here.

Do you think Sebi and AMFI have created an unnecessary flutter in the markets by their recent statements regarding mid-and small-caps?

I think, from an investor awareness and protection perspective, this might actually be beneficial in the long-term in terms of reducing volatility, something investors find hard to deal with.

Do you expect the overall return in Marcellus' Little Champs and Rising Giants portfolios to remain subdued this year as their focus is mostly on the midcaps?

Our small and midcap portfolios haven't participated in this rally given the quality bias.

We expect our portfolios to do better than the broader market in a period of weakness; and remain committed to quality irrespective of the broader environment.

Is the earnings momentum of India Inc largely on track? If so, don't you think that the market valuation, too, will eventually correct when the earnings come through?

Yes, that is the hope. Given the macroeconomic strengths, the market is pricing in a reasonable earnings growth and hence justifying current valuations. But as ever, there are nuances -- there are pockets where earnings growth has been a concern, especially around consumption-driven sectors.

There are pockets where valuations are delinked from fundamentals and are vulnerable to disappointments. But at the overall market level, we are more or less in fair value territory.

What has been your investment strategy in the last six months?

Our strategy is more bottom-up and hence less prone to changes based on macro developments or elections.

Having said that, we are seeing opportunities in sectors exposed to the private sector capex cycle, where earnings growth can sustain reasonably into the future.

Private sector financials is another place where we are seeing attractive valuations relative to the rest of the market.

Do you expect flows from your clients to thin, or are you telling them to buy more as valuations become attractive?

On the contrary, we expect flows to pick up in challenging environments as our quality bias renders a counter cyclical support to portfolios as they are less correlated to broader markets.

What's the road ahead for the PMS industry as a whole for the next 12 - 18 months?

The financialisation of savings which has driven the industry over the last decade is a structural trend. So we expect long term growth in financial assets.

With that, alternative assets like PMS should grow at a healthy rate over the long term.

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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Rajesh Alva/

Puneet Wadhwa
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