Time to book profit and exit mid- and small-cap companies, says Kotak Alternate Asset Honcho Jitendra Gohil

Investors should consider exiting and booking profits in mid- and small-cap companies with limited free-float and significant recent valuation expansion, as many are trading at exuberant valuations. Additionally, investors should reduce leverage and adopt a long-term investment approach.

One year from now, the market will begin factoring in the March 2026E consensus EPS, currently estimated at approximately ₹1,200 for the Nifty Index. We believe the Indian economy could post further upside surprises, leading to resilient earnings or even minor upgrades. Considering the peak in the interest rate cycle, a favourable commodity price environment, and India’s relative attractiveness, we expect the 12-month forward PE to remain around 19x for the Nifty Index. Consequently, we anticipate the market could deliver moderate returns of about high single-digit over the next twelve months, with returns concentrated primarily in the first half of CY 2024.

Large caps have delivered about 14 per cent return YTD, while the mid-caps have delivered over 40 per cent returns. We now believe the risk-reward ratio is tilted towards the large caps in the near term. As discussed earlier, large-caps can deliver moderate return of high single digit in FY24 in our view.

This is positive for the emerging markets. India’s weight in the MSCI EM index has doubled to over 16 per cent compared to pre-Covid levels and FPI holding of BSE 500 is at a decadal low. However, we do believe that the market is bit too aggressive in forecasting rate cuts by the Fed. 

No.  2003 to 2007 was a different scenario altogether where the world GDP growth was significantly higher and countries were showing synchronised growth. However, this time around China is slowing down materially, while the US and India are surprising on the upside. We are in the midst of heightened geopolitical tensions while during 2003 to 2007, globalisation was thriving.

The US dollar appears overvalued compared to the underlying fundamentals of the US economy. Debt has skyrocketed, and the debt-to-GDP ratio could significantly increase from its already elevated level of approximately 120 per cent. Moreover, the US fiscal deficit ratio has doubled over the past four quarters, reaching around eight per cent, while interest costs are rising. As a result, gold could be a valuable portfolio addition, with a recommended weight of 5-10 per cent.

This is a double-edged sword, initially the JP Morgan bond index addition can bring about $22 billion inflows into the debt market. However, in future we will have to maintain good fiscal discipline as during challenging times we might face more outflows as well.

India’s political stability may lead to a lower political risk premium, thereby improving investor comfort with the country’s overall growth outlook. We will also watch out for the slowdown in China and its impact on global flows.

We have a robust advisory process and would like to keep the asset allocation decision with us. However, for the retail investors this makes a lot of sense as they may help to optimise asset allocation decision by the experts.