The broader market will linger around levels similar to what we witnessed in 2022-23, says Shridatta Bhandwaldar, Head-Equities, Canara Robeco MF, in conversation with Sanket Dhanorkar

Mid-cap, small-cap stocks likely to see further time correction: Shridatta Bhandwaldar, Canara Robeco MF

Investors should not expect a repeat of the past 4-5 years anytime soon, with mid and small caps likely to see further time correction after the recent price damage, says Shridatta Bhandwaldar, Head-Equities, Canara Robeco MF, in conversation with Sanket Dhanorkar.

Q. How are you seeing the current sell-off in the broader market?

A correction had been due for some time. The earnings had been weak for two quarters prior to this. The entire nine months’ earnings (April-December 2024) have been generally weaker than last year. The correction got postponed probably because of the excess liquidity sloshing around. However, the market started realising that the domestic sector had slowed down and capex was also moderating. The entire narrative around Trump started unravelling. As FIIs accentuated their selling, the rest of the market also started caving in. Even if it weren’t for these reasons, the correction would have transpired anyway because the earnings that were needed to support valuations were clearly unlikely to play out.

Q. Are valuations now attractive or could we see further value erosion in this space?

I would say it is a healthy correction. Many investors were coming and actually playing it like a casino. So there were a lot of excesses. A large part of it has now been taken out. My sense is that the broader market will linger around these levels, similar to what we witnessed in 2022-23. It may not necessarily remain sideways for as long, but I wouldn’t be surprised if there was further time correction rather than price correction. I think the price correction has largely played out, but the entire time correction is not done.

We still feel that the broader market construct is not broken, because unlike in past cycles, this time there are no balance sheet challenges. We hardly find leverage in the smaller companies in our portfolio. To that extent, multiples may not correct as much as they did in, say, 2017. You need a big balance sheet catalyst for multiples to really de-rate. If this earnings dry run continues for another year, then, of course, they’ll keep correcting. But I’m hoping the earnings growth will go back to double digits next year.

Q. Do you see a repeat of the past 4-5 years anytime soon in the broader market?

No, investors should forget about that. Even after this correction, the valuations are at a much higher level compared to the past cycles. Starting valuations must be at an attractive level for returns to be that high. However, earnings are not going to be like that. Multiples cannot possibly re-rate from where they are. Considering purely statistically, it is only the large caps that have come back to fair valuation. Even those are not cheap.

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Q. How are you positioning your mid-cap and small-cap fund?

Incrementally, we are focused on pockets where the froth gets taken out. We are trying to focus more on relatively resilient business models, where there is no challenge in near-term growth prospects. For example, industrials have been completely wiped out, but within these, there are pockets where there won’t be earnings challenges for the next four-six quarters. When the markets stabilise, those will be the stocks that will come back fast.

Q. Are you worried about liquidity deteriorating if the correction deepens?

It is a possibility if the earnings don’t come back quickly and the market lingers for a longer period. The investors who have come in the last one year would have made lower than fixed-income returns. You will see more pain if there is a time correction compared to price damage.

In our own funds, the liquidity position is very comfortable for now. On all parameters laid down by Sebi, we are probably among the top funds. Even the small-cap fund, which is fairly large, is comfortably placed. We are conscious of running liquid portfolios. We actively focus on risk controls and run our own internal liquidity parameters as well.

For instance, we have among the lowest percentage of stocks below the Rs.5,000 crore market cap in the category. We also have criteria around the free-float holding in our portfolio stocks. As of now, we haven’t seen any material slowdown in the flows in these categories. Redemptions may become a problem only if the market lingers near the bottom for another six months. That is when investors will start getting anxious.

This story originally appeared on: India Times - Author:Faqs of Insurances