Expect near-term volatility, short-term investors should stay away

Nifty Pharma index has corrected nearly 17 percent since the beginning of 2016 and 3 percent from 2017.

The frontline indices (Sensex and Nifty) surged about 29 percent in FY17 while broader indices - Midcap and Smallcap - rallied 47 percent and 57 percent, respectively, in the same year.

But the performance in 2018 so far has been mixed with Sensex rallying 12 percent and midcap & smallcap indices losing 7 percent & 12 percent, respectively, year-to-date.

"We really had a cautious stance on mid-cap space since the start of this year due to high valuations. Lot of companies corrected sharply due to their weak business and weak financials but good companies did not correct much," Vinit Sambre, Head of Equities, DSP Investment Managers told CNBC-TV18.

The rally seen in mid and smallcaps in July and August along with frontline indices was because of in-line or better-than-expected earnings in the June quarter.

"But that was low-base supported earnings growth, so although these stocks have corrected, valuations are still not at reasonable level given micro headwinds and elections lined up next year," Sambre said.

It is definitely not a buy for short term, but long-term investors who have 3-5 years' view can keep building their exposure to these stocks, he advised.

Generally in equity, a fund manager always looks at long-term averages.

In the past 20 years, frontline indices have given 11-12 percent CAGR return.

"My sense is small and mid-cap corporates are more confident. After interaction with management, such trend should continue, so one should remain invested for next 3-4 years," Sambre said.

But for short term or one-year view, he feels, the situation is unpredictable due to upcoming state and general elections. "Near-term volatility will be higher, so short-term investors should stay away but long-term investors can still look at current levels given strong economic growth going ahead."

Pharma

DSP Investment has been gradually adding exposure to select stocks in the pharma space.

In last three years, he said these companies had gone through USFDA concerns and US generic pricing pressure, but now USFDA-related issues are on the verge of clearance and some of them have already been cleared, approvals started coming in, though pricing pressure is unabated in the US.

Nifty Pharma index corrected nearly 17 percent since the beginning of 2016 and 3 percent from 2017.

Sambre believes the pricing is at the bottom level of pyramid, so these stocks should do well in next 2-3 years.

The rupee depreciation also benefitted pharma as well as IT companies, he said, adding that companies which were impacted by GST are also picking up momentum. "Changes are structural, so keep looking at select pharma companies."

IT

The initial phase of rally in technology stocks was due to marginal uptick in growth and margin expansion, he said. "After interaction with management, we feel demand momentum is picking up."

So it makes sense to look at technology stocks given picking up in business momentum and support from rupee, he said.

NBFCs

He feels some of the niche NBFCs will grow significantly and the next 3-4 years will be better for these firms given size and scale of opportunity. "NBFCs which have done strong job of maintaining asset quality, there sustainability of growth is high."

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