“You make most of your money in a bear market, you
just don’t realize it at the time.”
Markets were range-bound in May. While large-cap
stocks lagged, mid and small caps delivered strong earnings. Sectors like IT,
cement, and insurance performed well, aided by valuation comfort. Financials
consolidated, while selective profit booking amid US tariff concerns allowed
for reallocation at more attractive levels. The swift market recovery from
intra-month lows suggests strong accumulation and broad investor participation.
India’s economic momentum remained strong in FY2024–25,
with real GDP expanding by 6.5%, and Q4 (Jan–Mar 2025) posting a robust 7.4%
growth, surpassing expectations. Key sectors including construction,
manufacturing, and defence led the growth during the quarter.
India has now become the 4th largest economy globally,
marking a significant step in its global economic ascent. Projections remain
optimistic, with the country potentially becoming the 3rd largest economy by
2028.
While the Industrial Production (IIP) growth moderated to
2.7% in April 2025 (from 3.9% in March), rural demand indicators are improving.
Higher Rabi yields after four years, stable crop pricing and rising real rural
wages supported by government cash transfers and free electricity schemes in
key states have improved rural liquidity and sentiment.
The early onset of the South-West monsoon (eight days
ahead of the usual date) under neutral ENSO conditions is expected to benefit
the Kharif crop season, further boosting the rural economy.
On the global front, the US economy contracted by 0.2%
(annualized) in Q1 2025, with trade weighing heavily on growth. Additionally, a
new tax provision in former President Trump’s bill — targeting countries with
“discriminatory” tax systems — has unnerved Wall Street and may deter foreign
investment in the US. This, along with a potential dollar devaluation, could
prompt capital inflows into emerging markets like India.
Key events in June:
- RBI Interest Rate Decision on 6th June. Expect
25 bps rate cut. +ive for markets. - A team of US officials expected to visit India
this month for trade talks, there is a possibility that the two countries may
agree on an interim trade pact by June 25. +ive for markets. - Fed Interest Rate Decision on 18th June. Expect
no change. Neutral for markets.
Are Small Caps Overvalued? The best thing to come
out of the exercise that the capital market regulator undertook in 2018 to
re-categorise mutual funds was standardisation. The definition of large-cap,
mid-cap and small-cap funds was standardised so that all equity funds could follow
the same definition.
Advances in the equity markets have led to an increase in
the market capitalisation of each of these groups of stocks. But the number of
these stocks in each of these baskets has remained the same.
Perhaps the time has come for the Securities and Exchange
Board of India to expand the baskets. Here’s why.
The size of the problem: As per the current rules,
here’s what a large-cap, mid-cap and small-cap stocks look like:
- Large-cap: The 100 largest listed stocks by market capitalization
- Mid-cap: Stocks ranked between 101 and 250 by market capitalization
- Small-cap: Stocks ranked 251 and onwards by market capitalization
The Association of Mutual Funds of India has to update
this list every six months, based on data provided by the stock exchanges.
While the definitions of large-cap, mid-cap and small-cap
stocks have remained the same since 2018, the market dynamics have changed a
lot over the years.
While publishing valuation data of indexes, only top
100-250 stocks are counted in Small Cap Index, while the universe is of 5000
Stocks. This does not reflect the true value of that index and often treated as
overvalued.
India is a growing economy and most of the small cap
stocks have already become mid-caps by market capitalisation but being treated
in small category due to definition hurdle.
Expanding the basket: Given the increase of
inflows in mutual funds, it is evident that many fund managers would find the
current limit of 100 stocks for large-caps and 150 stocks for mid-caps
restrictive. Comparatively, small-cap stocks have a larger universe
beyond the 250th stock by market capitalisation.
As a result (but not only because of it), many fund
managers in active large-cap funds (and now midcap funds also) find it tough to
consistently beat their respective benchmarks. On the other hand, active
small-cap funds still have a much bigger universe of stocks at their disposal
and do much better than their benchmarks regularly.
Keep in mind how the Indian markets are growing
and more SIP money is flowing in. We don’t want to be in a situation where
we have a problem of plenty and too much money chasing a few stocks in the
large and mid-cap space.
So there may be a need to provide a bigger canvas for
large-cap and mid-cap fund managers to operate. And this can be done by
tweaking the market-cap bucketing definitions. SEBI should think on this and
widen definitions to increase number of large and mid-cap stocks.
Investment Strategy
- Nifty range 23,500-25,500; downside limited.
- Since COVID Govt has spent huge amount in capex,
which led to huge growth in economy. Post Trump elections & tariff
announcements, Business houses had put a pause on their expansion plans till
clarity emerges. - In last 6 months since tariff announcement,
there has been more chaos than clarity and Trump tweets & policy changes
every now & then added more fuel to the fire. - Trump 90 days waiver is ending soon and nobody
knows what will happen. Geo-political tensions between Ukraine-Russia,
Israel-Iran, India-Pakistan has escalated more than before. - Downgrade of the US credit rating by Moody’s is
increasing bond yields and making more attractive for investors to park money
in long term bonds than elsewhere. - New risk in the form of COVID has emerged. Cases
are growing as of now, but to early to press the panic button. - We expect this chaos to continue for next few
months, hence halting any business expansion plans by corporates, resulting in
lower growth. Current growth nos. are already factored in by markets and expect
to remain sideways for next few months till clarity emerges. - RBI is expected to further cut rates this year,
at least by 50 bps, hence bond yields will increase, making Debt funds
attractive. One can expect double digit growth in high secured Debt funds.
Hence allocating a 35% ratio in Debt funds this month is recommended.
