Midcaps often misunderstood as being too risky, says Neelesh Surana

Surana shares his insights on navigating uncertain market conditions

Every bull market attracts a new group of investors unfamiliar with volatility or market downcycles. Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India), shares his insights with Puneet Wadhwa in an email interview on navigating uncertain market conditions. Edited excerpts:

 

Has the market corrected enough for investors to start cherry-picking? 

This correction should be viewed in the context of the absence of drawdowns over the past 19 months and is driven by foreign institutional investor selling due to global factors and weaker-than-expected July-September 2024-25 (FY25) quarter results. It serves as a healthy breather, and we remain constructive on Indian equities.

 

The domestic economic outlook is stable, supported by strong macroeconomic fundamentals and healthy corporate balance sheets, which should sustain steady —albeit moderated — earnings growth. Sectorally, we see reasonable value in banking, consumer discretionary, healthcare, and metals.

 

Has the recent correction opened up opportunities in midcaps and smallcaps? 

Midcaps are often misunderstood as being too risky. However, over the past five years, their scale, diversification, and representation across various industries have improved due to initial public offerings, a shift towards organised sectors, and strong inflows. Midcaps also offer valuable sector representation; some are sector leaders but do not feature in the top 100 slots that define largecaps.

 

Quality sector leaders in midcaps should form a reasonable portion of the portfolio. To mitigate the risks inherent in such categories, we recommend investors participate via systematic investment plans (SIPs) in funds like ‘large and midcap’, ‘flexicap’, or ‘multicap’.

 

You joined Mirae Asset Mutual Fund in January 2008 and have seen various market cycles. Is this time/correction different?

  Across market cycles, a consistent pattern emerges: excesses tend to mean-revert over the long term. The current market condition stands out for two reasons: first, no sector is exceptionally cheap despite the correction, and second, the impact of massive local inflows.

 

The scale of these inflows — while reducing volatility — has also led to more paper supply through stake sales. The stability of SIP flows and earnings stabilisation, following a subdued quarter, could make this correction short-lived. However, predicting short-term market movements remains challenging.

 

Do you suggest investors wait out this uncertain period in the markets? 

The role of domestic investors is substantial, with SIP inflows of around $3 billion per month. While domestic inflows help reduce short-term volatility, the long-term sustainability of markets will depend primarily on earnings growth.

 

Long-term investors should remain disciplined, focusing on strategies like SIPs and risk-based asset allocation. Historically, these approaches have delivered positive outcomes in uncertain periods. It’s also prudent to pare return expectations, given that valuations are reasonable but not extremely cheap. Investors with a moderate return expectation and a five-year horizon are unlikely to be disappointed.

 

What's your view on the road ahead for corporate earnings?

  The first half of FY25 saw subdued earnings growth due to factors like election-related constraints, low government spending, a heatwave, and a challenging external environment. We expect a recovery in 2025-26, with earnings growth returning to the low teens. This rebound will likely be driven by increased mass consumption, resumed government spending, and some global stability.

 

To what extent are you using artificial intelligence and machine learning (AI-ML) to find investment-worthy opportunities? How is the industry reacting to this ‘new’ fund manager?

  AI-ML is increasingly being employed as a research tool to assist analysts. These technologies are useful but cannot replace the nuanced decision-making required in fund management.

 

Besides fundamental analysis, fund management involves understanding the finer aspects of a disciplined framework and managing emotions like greed and fear — factors that machines cannot easily quantify.

 

Markets have attracted several new investors who have not yet experienced a downturn. Do you fear they will stop or curtail their SIPs if sentiment does not improve?

  Every bull market brings in new investors unfamiliar with market volatility or downcycles. It’s crucial to convey two key points to them:

 

One, confidence in the economy’s growth drivers, which are unaffected by short-term market fluctuations.

 

Two, the importance of realistic and modest return expectations. 

Historically, SIPs have proven effective, especially during downturns, and remain a solid strategy for patient investors, including those new to the market.

 

Success in Indian equities requires a long-term outlook of five to 10 years, and SIPs are well-suited to that time frame.

 

What has been your investment strategy in the past few months? 

We have focused on selecting businesses with growth resilience at reasonable valuations while ensuring portfolio diversification. High-valuation stocks have been avoided in favour of sector leaders offering better risk/reward ratios. Key overweight positions include financials, consumer discretionary, healthcare, and metals.