Ample room for growth in small-mid-caps: Nimesh Chandan,Canara Robeco MF

"Currently, there are no signs which indicate that we are moving into a crisis or a bear market," said Chandan

Valuations in certain pockets are lofty, but there are no signs of markets slipping into bear territory, says Nimesh Chandan, head-investment, Equities at Canara Robeco Mutual Fund. In an interview with Chirag Madia, Chandan says we could see corrections which are normal in any bull market and investors shouldn’t try to time their entry and exit. Edited excerpts:

Markets are hovering around lifetime highs. Do you think they have run ahead of fundamentals?

In March 2020 there was a lot of fear due to Coronavirus (Covid-19). As the mortality rate rose, we saw stringent lockdowns across the country. There was panic in the markets since there was no vaccine or medicine for this virus. Hence, markets crashed across the globe. The second wave of the Covid-19 pandemic became a bigger healthcare crisis. But as a business crisis, it had less impact compared to the first wave. This is because this time businesses were better prepared, and the lockdowns were less severe. Currently, with the vaccination programme picking up pace, investors are looking at economic normalisation in the second half of FY22 and beyond. I believe we will see a further acceleration in economic growth coming from the investment side. We will see government spending on infrastructure, we will see healthy export growth, and a pickup in manufacturing capex.

How comfortable are you investing at current levels?  Do you see a case for taking some money off the table?

Currently, there are no signs which indicate that we are moving into a crisis or a bear market. Assuming there is no bear market and serious crises, we might only see corrections in the markets. And corrections are part of bull markets. It is also difficult to time the correction hence, as a team, we do not try to time it. We advise our investors to do the same  - to avoid trying to time the entry and exit for the short term. If we see any problem or crisis severely impacting our growth projections, then we can think about taking some money off the table.

What are the key risks which might derail the returns of Indian equities?

One of the risks is on the Covid-19 pandemic side. A new mutant or wave, which comes in, can be one risk.  Secondly, if interest rates go up significantly, we will have higher discounting for equity valuation and business activity, which has resumed, might once again slow down--impacting the overall growth.

Commodity prices have firmed up globally. Do you see inflation as a big risk?

At this point in time, it looks like inflation is transitory. Central banks are also expecting the same and hence they are not rushing to increase the interest rates because of inflation. There is a shortage or short-term mismatch in demand and supply which has led to a sharp rise in commodity prices. This is something we will monitor over the next few months, but it looks like we might see a lower inflation number in the next six to nine months.

Where are you finding the opportunities in this market?

There are certain sectors that have reached reasonable valuations, while some companies are in an over valuation zone. However, there are pockets of value in mid- and small-cap categories where valuations deserve re-ratings. I am quite positive on the capex cycle in the country where valuations are attractive and growth prospects quite strong. Investors can look for healthy compounding growth in the next three-five years. However, the returns we have seen in the last one year will not be repeated. Investors need to keep their expectations a bit moderated going forward.

There has been a sharp rise in valuations from mid- and small-cap companies. Do you think there is a bubble building in this space?

It's only in the last six months that there has been significant outperformance by mid- and small-cap stocks. I believe there is ample room for growth even now as there are a lot of pockets where valuations are reasonable, and growth is underappreciated. There are a lot of companies in mid-cap and small-cap categories, which are leaders in their segments like in specialty chemicals, ecommerce, logistics, capital markets and industrial products. Rally in mid- and small-caps will continue, but one will have to be selective.