Don't see fortunes of mid- and small-caps changing soon, says Samir Arora

While 2019 was a good year for the Sensex and Nifty50, mid- and small-caps indices suffered. At the same time, returns from equities (main benchmark indices) have fallen from 13 per cent compound annual growth rate (2000-2009) to 9 per cent (2010-2019). Market experts believe 2020 could be the comeback year for mid- and small-caps. Samir Arora, founder and fund manager, Helios Capital, doesn’t think things will change much for these stocks. He tells Joydeep Ghosh that there needs to be a change in the mindset that classifies every defaulter a thief. Edited excerpts:  

Why do you think this sharp fall in decadal returns has happened?

India has gone through a significant churn as big investments made between 2007 and 2010 suffered due to various issues: Corruption, judicial activism, poor execution, delays, and others. This led to aversion on the part of the private sector to invest in any new infrastructure/capital expenditure.

Do you think single-digit returns will be the new normal? 

Over time, returns will revert to double digits (in fact, mid-double-digits). Gross domestic product in nominal terms should move back to the 12-per cent range. All of this will lead to better returns from the stock markets. 

While the Sensex and Nifty hit new highs in 2019, mid- and small-caps suffered. Will fortunes change this year?

I do not see them changing in the first few months unless the Union Budget has some unexpected positives related to equity investments (like removal of long-term capital gains tax). As growth picks up and funding issues improve, the market will have better breadth. This does not mean all mid-cap stocks will do poorly, but mid-caps in aggregate will not do as well so soon.

Which are the sectors you would be looking at in the coming year?

We primarily invest in only three themes and will continue to do so. They are the financial, consumer (broadly defined), and the information technology sectors for the most part.

You have given strong views about foreign investors being sold Indian assets. What is the solution, given the absence of funds with domestic companies?

It is first a mindset issue. If we label every defaulter a thief, there is little chance for them to get funding from other sources. Projects in which the implementation risk is already over and are now annuity-type projects can also be easily sold to Indian pension funds via good domestic managers who can do due diligence. This first needs Indian pension funds/insurance companies to be encouraged/allowed to buy such assets.