Don't shun midcaps, smallcaps just because they surged 40-50%: Invesco CIO

The direction of interest rates globally and results of the Lok Sabha elections will determine the trajectory of the Indian equity markets in 2024, says Taher Badshah, chief investment officer (CIO), Invesco Mutual Fund. In a telephonic interview with Abhishek Kumar, Badshah says he is seeing opportunity in the mid-to-lower-end consumption pockets of the market that have not done well in the past two years. He is expecting the FMCG, banking and information technology sectors to turn the corner in 2024. Edited excerpts:

The market has ended 2023 on a strong note. Can this momentum continue in 2024?

What will matter in 2024 from the market standpoint is the direction of interest rates globally, as well as in India. The results of the general elections will also be keenly watched. The market has already priced in some of it but sentiment can improve further if we get more surety on the interest rate trajectory. Commodity and oil prices are always a risk from an inflation point of view, but they are not likely to become a cause of worry. Since China is moving on to high-tech streams like AI robotics and digital electronics from typical investment-led activities, higher growth there won’t bump up commodity prices like what we have seen before. Oil prices may be volatile, but they shouldn’t be a concern. Considering these factors, India can continue being in a sweet spot, which means that we can have a good time in the market a little longer.

What are your earnings growth expectations from midcap and smallcap stocks? Will they be enough to sustain current valuations?

If their growth is around 4 percentage points higher than largecaps, their valuations are not very demanding. At the index level, midcaps and smallcaps will have to grow somewhere around 18-20 per cent if the Nifty50 goes up 13-15 per cent. They seem very expensive if you look at the kind of returns they have given in 2023, but if you take two-year returns into account, they’re not that high. The indices are up 20 per cent CAGR in the two-year period.

Which funds would you recommend to investors based on your view on different segments of the market?

Talks around high midcap and smallcap valuations may tempt investors to shift allocation towards largecap funds, but I think funds like flexicap and multicap are better placed in the current scenario. If someone has a longer horizon, SIPs in smallcap funds are still a good option.

Wouldn't it be better to wait for a correction in the smallcap and midcap space to start investing?

One shouldn't be necessarily negative on midcaps and smallcaps just because they have delivered 40-50 per cent return in a year. A 5-10 per cent correction can provide a better entry point but SIPs can be a better option than trying to time the market. In the medium term, they can still compound at 20-odd per cent given that they are better placed to leverage the domestic growth cycle. Hence, if the domestic economic cycle does well in the coming years, these smaller stocks can deliver good returns.

Which sectors can turn the corner this year, or beat earnings growth expectations?

We see opportunity in the mid-to-lower-end consumption pockets of the market. This segment has not done well in the past two years. FMCG is one sector that will benefit if inflation and interest rates go down. Banking is another segment that has underperformed and can do well this year. Information technology is the third area from where positive earnings surprises can emerge but they are unlikely in the first half of 2024.