According to The Economic Times, Krishnan VR of Marcellus Investment Managers believes that despite a 16-month period of subdued returns, mid- and small-cap valuations remain elevated relative to history, limiting the scope for a sharp rebound. The fund manager notes that while domestic macro backdrop looks stable, Nifty 50 forward PE is still above long-term averages, with mid and smallcap indices continuing to trade at valuation premiums both versus own history and compared to large caps despite the derating seen over this period. As reported by The Economic Times, there is expectation of earnings recovery in FY27 partly on the back of improvement in household consumption following tax, interest and GST cuts.
As reported by The Economic Times, the Q3 earnings season revealed relatively strong earnings growth among PSU banks, metals and oil and gas stocks, which was a clear takeaway from the quarter. The recovery in mass market consumption and acceleration in auto sales was expected due to GST cuts, but the relatively strong earnings growth among these sectors was a positive surprise. Generally, these so-called low PE or 'value' sectors have rerated on the back of better than expected earnings growth since Covid, with a broad-based earnings growth across most sectors potentially possible in FY27, though sustainability remains uncertain without quality job creation and wage growth improvements.
According to The Economic Times, structurally well-positioned sectors include healthcare services where rising penetration over the next 10-15 years should be positive for hospitals, diagnostics and health insurance. Companies in insurance, RTAs, depositories and wealth management offer attractive plays on the structural trend of financialization of household assets. For financials, the backdrop looks positive for lending financials with private banks expected to see stable to improving Net interest margin in FY27 after a dip last year, as deposits get repriced. Credit growth inched up in Q3 results for most banks and should increase further if nominal GDP growth accelerates in FY27.
As reported by The Economic Times, within IT services, investors should be careful about exposure to BPO or pure software development, as these are among few areas which can be disrupted relatively easily by current Gen AI systems. The near-term earnings outlook may not be a driver of IT services stocks unless several IT companies were to guide for a decent pick-up in revenues in the next 1-2 quarters. Given the rapid pace of capability improvements in foundational LLM models seen over the last few years, the market will be wary of terminal value of most IT services business models, hence investors should not be anchored by historical valuations.
According to The Economic Times, Marcellus Investment Managers continues to prefer large caps at this point in time given relatively more reasonable valuations. The fund manager's investing style remains sector agnostic, focusing on high quality companies with clean accounts, strong balance sheets, returns on capital greater than cost of capital for long periods of time, and available at reasonable valuations irrespective of macro or themes. Regarding smallcaps, while a bounceback is possible, the fund manager doesn't expect another smallcap rally like in 2021 or 2023, unless sentiment or fund flows change dramatically either supported by better than expected earnings growth or higher domestic retail flows.
