Expert view: Optimism overextended, consider reducing exposure to midcaps, smallcaps, says Vaibhav Porwal of Dezerv

Expert view: Vaibhav Porwal, the co-founder of Dezerv, believes it is time to book profits in mid and smallcaps due to their rich valuation. At the same time, he sees value in largecaps. In an interview with Mint, Porwal shares his outlook for the market and discusses economic trends.

Edited excerpts:

What is your medium-term outlook for the market, especially after the Budget?

This will be an important Budget as it will set the tone of policy measures for the next five years.

We believe the Union Budget shall balance enhancing consumption and increasing investments, which is essential for sustainable economic growth.

Although a weaker majority may pressure the government towards populist measures, we expect it to maintain its fiscal consolidation commitment.

While India's macroeconomic fundamentals are strong, policy efforts will be directed towards transforming India into a developed economy by 2047.

To tackle the issue of sluggish rural demand, we anticipate the budget introducing various reforms aimed at increasing rural employment and enhancing farmers' incomes.

The government has prioritised infrastructure investment, doubling the capital spending to GDP ratio from FY19 to FY24.

While we anticipate ongoing government support for infrastructure projects, we also expect the government to incentivise states and private companies to contribute to the next phase of infrastructure development.

The Indian stock market seems to have discounted most factors, and there are concerns over rich valuation, too. Is it the right time to buy stocks?

Given the continued market rally which we have witnessed since April last year, the equity market seems to be trading at slightly stretched valuations.

Therefore, at the current juncture, it is essential to exercise caution. While there may be select opportunities, the overall risk is higher at this juncture.

It would be a good time to review your portfolio and book profit on some of your investments, especially in the mid and small-cap space.

At Dezerv, we see value in large caps and have consistently increased our exposure to large-cap funds.

Also Read: Sensex gains 8,000 points in 1 month, Nifty 50 tops 24,400; is Indian stock market overheated? A deep correction coming?

How do you see the growth and inflation dynamics playing out from here on? Is the worst behind on the front of inflation?

The government’s investments spurred India’s economic growth despite a challenging global economic environment.

However, sluggish growth in the rural economy and moderate growth in private consumption have been major setbacks.

The good news is that inflation has decreased significantly, showing the central bank's (RBI) ability to manage growth and price stability.

However, a new Budget packed with populist giveaways could reignite inflation worries.

Also Read: What is causing IPO boom in India? Why are experts worried about investor frenzy?

When do you expect the Fed and the RBI to start rate reduction?

According to the Fed’s dot plot graph, 15 out of 19 officials anticipate an interest rate cut this year.

This insight reveals how officials are responding to the incoming data. We foresee at least one rate cut by the Fed in 2024, with the RBI likely to follow suit.

Domestic retail investors have recently emerged as a formidable force in the Indian market. How do you see this development?

The rise of domestic retail investors is a big positive development for the equity market in the long run. It has brought depth and stability to the equity markets.

On the flip side, some less experienced investors might be susceptible to reacting to market volatility and could end up selling in panic.

Given India's strong growth prospect, some smart investors have taken the opportunity through these bouts of volatility and invested strategically.

Also Read: Expert view: Market outlook bright; positive on manufacturing, capital goods, exports, says Dikshit Mittal of LIC MF

Is the optimism about mid and small-cap sectors overblown? What should be our strategy for these segments of the market?

Current valuations at the index level indicate that mid- and small-cap space optimism is likely overextended.

If you're considering investing based on past returns, proceed with caution.

This is also an opportune time to book profits and capitalise on the strong rally we have seen.

Investors should reassess their market capitalisation allocation and consider reducing exposure to mid and small-cap stocks, depending on their risk appetite.

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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.