Neelesh Surana, Chief Investment Officer, Mirae Asset Investment Managers (India), prefers multi-cap funds over pure small-cap funds after the recent rally in the broader market. In an interaction with Business Today, he shared his views on the Indian equity market, sectors that are looking attractive, asset allocation and the mutual fund strategy for the next five years. Edited excerpts:
BT: Indian equity markets are hovering at their record high levels. Do you think the momentum will sustain moving forward?
Neelesh Surana: The Indian equity markets are currently at record high levels, driven by long-term earnings growth potential, and benign flows. Earnings of NSE500 companies have increased from Rs 4.1 lakh crore in FY20 to about 13.8 crore in FY24e. In addition, SIP flows have more than doubled, along with pension funds and AIF investments. It's challenging to predict near-term movement in markets and whether this momentum will continue. Therefore, it’s crucial to stick to the basics of long-term investment at this juncture.
BT: Which factors do you think will drive market sentiment?
Neelesh Surana: Our confidence in India’s robust and sustainable factors driving secular growth leads us to maintain a positive outlook on equities amid global chaos. Factors such as a renewed capex cycle, a well-capitalised banking system, robust credit growth, an upturn in the housing sector, robust domestic consumption, and growing services exports support our constructive outlook. The IMF projects India to contribute 7-8% of the world’s incremental GDP from 2024-2028, sustaining growth over the next several years. Earnings growth is expected to be anchored around the low teens over the medium term, driven by a likely turnaround in consumer sentiment, corporate spending, and resilient bank balance sheets.
BT: Which pockets or sectors are looking attractive at current levels, and why?
Neelesh Surana: Regarding attractive sectors, apart from BFSI, we have a positive outlook on consumer discretionary. Within consumer discretionary, we especially like subsegments like mass retailers, footwear, building materials, food tech, online fashion, airlines, etc. The sector’s valuation has become reasonable after a time and/or price correction, making it an attractive option for investors looking to capitalise on the improvement in per capita income over the next decade.
BT: What kind of mutual funds should investors buy for the next 5 years?
Neelesh Surana: For mutual fund investments over the next five years, we recommend adopting a carefully structured and balanced allocation towards equities, demonstrating a long-term commitment. Existing investors could continue SIPs, while new investors should consider investing via SIP in hybrid products like Multi-asset or Balanced Advantage categories.
BT: Which factors do you think may drag markets down?
Neelesh Surana: Headwinds for the market could include global economic and geopolitical uncertainties, along with the limitation of incremental growth from the central government’s capex, which has tripled over the past five years. High valuations in specific frothy pockets pose a significant challenge, although this is not representative of the entire market.
BT: The BSE Capital Goods index has rallied more than 75% since January 2022. Do you see any impact of the ongoing crisis around the Red Sea on the sector going ahead? What is your advice to investors?
Neelesh Surana: Regarding the impact of the ongoing crisis around the Red Sea on the BSE Capital Goods index, we believe that the crisis is not a significant factor for the sector. The sector has performed well due to a strong domestic order book and improvement in margins. While we are positive on the business momentum, we are cautious about stocks as their valuations are factoring in the best-case scenario. Good businesses may not necessarily be good stocks if their valuations do not have enough margin of safety.
BT: The BSE Real Estate index has more than doubled investors’ wealth in the past 14 months. How do you see the trend moving forward?
Neelesh Surana: Similarly, the BSE Real Estate index has doubled investors' wealth in the past 14 months, driven by better affordability, rising aspirations, and consolidation among players. As stock prices have already rerated, we would prefer late-cycle building materials to play the real estate theme.
BT: What is your view on midcap and small caps after the recent outperformance?
Neelesh Surana: After the recent outperformance of midcap and small cap stocks, we are cautious about subsectors that have seen massive melt-up. Businesses characterised by high cyclicality, asset heaviness, debt burdens, lack of cash flow, low ROEs, and sub-par management raise concerns about the quality of the rally in this segment.
However, the relevance of the mid and small-cap segment as a whole has improved dramatically over the last five years due to an increase in the choice of businesses and the positive impact of formalisation in the economy, benefiting organised strong players, most of which are mid and small caps. The choice of sectors has increased multifold in the last five years with companies within $1 billion to $10 billion increasing from about 380 to about 730. Overall, at current levels, we will prefer multicap funds over pure small-cap funds.
BT: How can one invest Rs 10 lakh in this market?
Neelesh Surana: For investing Rs 10 lakh in this market, we recommend maintaining a structurally equal-weight allocation in equities from a long-term viewpoint. Investors should not be deterred by volatility and uncertainty but should follow a well-crafted asset allocation with equal weight to equities. Fresh investments can be made via SIPs in hybrid products to ensure disciplined investing.