‘Current stock valuations high, offer low margin of safety’: Vinit Sambre of DSP MF

Both small-midcap and large-cap companies can offer investors the potential for reasonable returns, but they come with different levels of risk. Small-midcap companies have historically tended to outperform large-cap companies over the long term. This may be due to small-midcap companies having the potential to grow more quickly, which can lead to higher returns for investors. However, small-midcap companies also tend to be more volatile and less predictable than large-cap companies, which means they may be riskier investments. In 2022, economic uncertainty and geopolitical issues caused a decrease in risk appetite, resulting in underperformance of equities, particularly small-cap companies. However, if inflation concerns ease and interest rates moderate, it is possible that small-midcap companies could outperform as risk perception decreases.

India is a promising market with the potential for long-term wealth generation, which is why both domestic and foreign investors remain interested in it. While foreign institutional investors have reduced their exposure in 2022 due to high valuations, they still have faith in India’s strong fundamentals and may return to the market at more reasonable valuations. Domestic investors have also demonstrated good behaviour in volatile markets, and we anticipate that they will continue to be a part of India’s growth journey.

Approximately 25-30 per cent of the profits represented in the Nifty-50 index come from sectors linked to global commodities. If there is a global economic slowdown, this profit pool and other sectors may be negatively impacted. Therefore, the market may not be fully insulated from the effects of a global slowdown and there could be earnings downgrades. Given the potential for earnings downgrades and the associated risks, current valuations may appear high with a low margin of safety.

We believe that the banking sector is attractive due to its improving performance, including higher credit growth, stable net interest margins, low credit costs, and improving return on assets. Additionally, we believe that the auto sector is poised for growth as it recovers from a period of slowdown. Although the healthcare sector may face challenges due to rising raw material costs and pricing pressure in the US market, we believe these are temporary and are positive on the sector due to its strong cash flow and reasonable valuations. We have a long-term positive outlook on the technology sector due to the strong capabilities of Indian IT companies, the growing opportunity for digitisation, deeper client relationships, and high cash flow. The sector’s valuations have moderated due to global recession concerns, which makes it an interesting option for long-term investment.

We are cautious currently of investing in consumer discretionary companies due to increased competition that is undermining margins and rich valuations. We are also cautious about investing in commodities because of the impact of the global economic slowdown.

There are a number of factors that can potentially trigger positive market movements in India. One factor that could potentially have a positive impact is a reduction in global risks, such as the resolution of Russia-Ukraine conflict or moderation in interest rates. Reductions in global risks can lead to increased investor confidence, which can in turn lead to higher market valuations. On the negative side, given the current global volatility and swift geopolitical changes, there is an increased risk from unknown factors. However, based on what is known, we believe that higher, stickier inflation and high interest rates could pose a risk to equity valuations.