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Deepak Shenoy: If you have another 20-30 years to live, what is 6 months' dip?

ET Now|
Updated: Sep 11, 2019, 11.28 AM IST
Deepak Shenoy-1200


  • Midcaps are very important part of allocations in medium-term.
  • Indian economy is going to take some time to recover.
  • Small retail investors putting in more money into the market.
I do not know if the dip is permanent but the Indian economy is going to take some time to recover and there is no way to predict when that will happen, says Deepak Shenoy, Founder, Capital Mind. Excerpts from an interview with ETNOW.

On AMFI data, market outlook
We have seen a dip in equity as well as total AUMs. From the debt fund perspective, it would have been coming directly on the basis of investors moving a lot of money to fixed deposits because they are seeing downgrades or defaults and also on equity side because we had a 5% Nifty downtick last month and small caps fell by 9%.

There were 7 lakh crore AUMs that is about Rs 35,000 crore dip just in stock correction. I do not think inflows would have made up for that. AUM downticks are kind of expected at this point.

On Dips as a Trend
The dip is very shallow right now. You are talking only 10 per cent from the top, less than that in fact. We have seen a lot of midcaps correct substantially but the difference right now in the largecaps do not seem to have fallen that much. Some of the largecaps and the rest of the market have fallen 35-40%. So, one side of the market is exhausted in terms of selling. The other side has not seen much. We are still seeing interest in the top five to six names that continue to be making new highs.

Geopolitical changes are also taking place. Anything can happen with Trump and China. One tweet makes a 5 per cent dip seem ordinary. On the other hand, the upside of things will be if Trump and China make up, things may suddenly start moving in the positive direction. So, it is going to be volatile.

I do not know if the dip is permanent but the Indian economy is going to take some time to recover and there is no way to predict when that will happen. Some part of it will hurt for another six months, but if you have another 20-30 years to live what is six months in that time?

On Midcaps
Investors should be less concerned about some of those companies. It is true that some of them are in trouble. We have seen issues where they do not know where DHFL is going to go. We do not know where X company is going to go. But by and large, many of these valuations have corrected with a single digit earnings in place.

Many of the paper companies for instance, and autos (we own some of them) have PEs of four or three at a time when they do not seem to be seeing flagging growth. A significant part of the midcap universe is actually doing very well on fundamentals. There may be some small time corrections, but they are not overvalued by any stretch of imagination. If you look at their past 10-year PE ratios, they are in much better shape.

As a medium-term investment, midcaps have become a very important part of allocations right now. But again, these would not correct in a hurry and will take time because in midcaps, you first have discovery problems because nobody knows much about these companies and they will have to discover them.

Secondly, institutional flows are largely because largecaps are mandated by SEBI. Also 80% of largecap funds go only to the top 100 companies. That means anything beyond the top 100 has to be serviced only by midcap, multi-cap or small cap funds and those AUMs are much smaller.

Upon discovery, institutional flows will take time to come into midcaps. Even if you buy now, you should think of three- or four-year horizons before the market discovers them. Till then, you should be prepared to ask the question why is the market giving a premium to my stock? If you are able to do that, this would be a good time to start looking at midcaps.

On Multicaps drawing more funds Vs Mid & Smallcaps
It is interesting. There may have been an NFO of one of the funds. I do not know whether it happened in August or July. I think Mirae had a new multicap fund, they re-categorised one of their funds to a largecap fund and created a new NFO for a multicap fund, that raised a fair amount of money. It maybe skewing the inflow statistic in that regard. But if I look at the data, I see that even the smallcaps have seen a significant jump of over 60%. So, there have been about Rs 1,300 crore of inflows in smallcap funds and about Rs 1,500 crore of inflows in multicap fund area.

Given that it seems like there are some investors who like smallcaps and some investors who seem to like multicaps, I do not know whether I can make a justifiable conclusion from this data but it is just a month and because of this NFO and stuff like that, I do not think we are getting accurate real data flow that is more sustainable.

What is actually good is that we have had Rs 8,000 crore net inflow in equity funds month after month, when we saw a fairly large dip in the Nifty in July. I believe we have got a lot of news about the slowdown and all that stuff speaks of some kind of confidence. Debt inflows have reduced a little bit, if you take out liquid. But largely, investors still remain confident and that is pretty interesting because you would have thought that with all the news, people would have stopped investing.

On Equity Market Flows
EPFO has invested nearly Rs 2,000 crore a month into index funds. One part of that will sustain because they continue to want to invest in index funds. I hope they graduate from beyond the Nifty 50 to the Nifty Next 50, so that they are at least investing in top 100 companies, not just the top 50. I hope they will scale up that a little bit but apart. Apart from that, I do not believe that the investments will come down as yet.

We have been hearing about job losses but most of the money that comes into equity is usually not from blue collar workers, but from while collar workers. So, unless we start seeing while collar jobs getting fewer, the change in SIP concept may not really happen. Typically people will not do this unless there is a massive drop in the index itself. If there is a 10-15% drop in the index, I can almost guarantee that much of these flows will drop but right now, it does not seem like a lot of the flows are stopping and there seems to be some confidence among investors. Small retail investors at least putting in more money into the market.

Now, whether that is ill-founded or whether they are actually more prescient than perhaps the market gloom and doom scenario that is going on, only time will tell. I hope that they are right because nobody wants a flagging market but right now, it does not seem like the bad news is ending. The one piece of good news is they continue to invest and continue to find the markets exciting. I personally feel there are pockets of the market that are very exciting today.

I am hoping this will carry us all at least till the Diwali, Dusshera time when we should really see much better data as well.

On Buying Auto Stocks
I would buy auto stocks now. I do not think they are going to go down forever. I know people are feeling this is structural as people will own less cars and in general, car ownership is no longer as attractive. But, that is a temporary phase. I am looking at life beyond Indian cities. Public transport is almost non-existent and people do need to be mobile. I think, over time, two-wheelers should definitely pickup. The order will be two-wheelers first, four- wheelers next, commercial vehicles last, because commercial vehicles have the additional problem of having the same truck being able to carry more weight and because of GST, there is less time spent at check points, leading to a better turnover and more efficiency, It will take time for new truck demand to increase. So I think the order will be two-wheelers first.

We saw the first uptick in month on month demand in August in two-wheelers. All the three big ones had a good switch. While they were falling month on month, for the first time, I have seen an uptick. Let us see if this continues this month but if it does, that might be a signal.

Coming into festive season, this is going to be a bad month apparently. Some religious connotations mean this month is not a great time to buy vehicles, but if that is the case, then this would have been there every year. Some kind of aberration might exist but five, 10 years from now, we will have a lot more cars than today.

India as a whole sells as many cars as France which one-twentieth of our population and France is a country where almost everybody has a car. So, they are still able to sell new cars at the same level as India does. I do not think India is saturated by any stretch of imagination, but at this point we may be seeing a lull in activity and we are seeing a lull in activity. Give it six months, you will see the pain remain but the stock prices will be very attractive, if you look at it from a five year perspective, Buy over time, rather than at once. that is my thought process here.

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