Small & midcaps could see prolonged phase of pain; reduce exposure in speculative stocks: Gaurav Dua

“We expect a prolonged phase of pain in the broader markets. Normally, the corrective phase in small-cap stocks tends to last for a period of 12-15 months after a sharp multi-month one-way rally,” says Gaurav Dua, SVP head, Capital Market Strategy at Sharekhan by BNP Paribhas.

In an interview with ETMarkets, Dua said: “The CNX Smallcap Index tends to decline by 25-35% whereas individual stocks can correct by 30-70% in the corrective phase. Thus, it would be better to reduce exposure in speculative stocks with weak fundamentals in case of a bounce back,” Edited excerpts:

A strong week for Indian markets as benchmark indices rose by nearly 3%. What led to the price action in the week gone by?

Markets were volatile and a bounce back post a steep correction is normal. The improvement in sentiments was also aided by the easing of commodity prices which is good news for India as it depends on imports for its energy needs.

Where do you see Nifty and Nifty Bank headed in the June expiry week? Any important levels that one should watch out for? Do you think the bounce will sustain?

In the immediate term, the markets are expected to remain in a range of 15,200 to 15,800 on the Nifty50. Bounce will only sustain if it breaks out of the range.

We will move in the final week of the first six months of 2022. Sensex and Nifty are down by over 7% in the last six months. What is your outlook for the rest of 2022?

Bulk of the price correction in benchmark indices seems to be behind us now. But there could be time correction going ahead with markets consolidating around the 15,000 level on the Nifty50.

If we look at the valuation data on a trailing twelve-month (TTM) earnings basis, the Nifty trades at 20-21x FY2022 EPS this is not very far away from multiples of 18.5-19x made during the lows of March 2020 post the breakout of the global pandemic.

Also, the sentiment indicators point towards excess pessimism. Currently, over 85% of BSE 200 stocks trading below 200 Day Moving Average (DMA); and even in the US, close to 88% Russel 2000 constituents are trading below 200 DMA.

In the past two decades, the returns are quite healthy over the next 12-24 months if investors buy amid such heightened weakness in sentiments.

Commodity prices have started to cool off and any positive development towards the ending of Russia-Ukraine could trigger a turnaround in sentiments.

Sector wise, auto stocks bucked the trend, up 5-6% in a week. What led to the price action, and do you think the outperformance will continue in the coming week? Any strong performers which investors can watch out for?

Auto stocks have seen buying interest lately as the cost pressures are easing out with steep correction in metal prices and improvement in the availability of electronic components.

Moreover, auto stocks have been gross underperformers for the past 18 months and very reasonably valued even after the recent run up.

We have been positive on autos since March with M&M, Maruti Suzuki India, and Hero MotoCorp as our preferred investment picks within the OEM space. There is no change in our view.

Small & Midcaps slightly underperformed or in line with benchmark indices in the week gone by. How should investors play the broader market theme in the second half of 2022?

We expect a prolonged phase of pain in the broader markets. Normally, the corrective phase in small-cap stocks tends to last for a period of 12-15 months after a sharp multi-month one-way rally.

The CNX Smallcap Index tends to decline by 25-35% whereas individual stocks can correct by 30-70% in the corrective phase. Thus, it would be better to reduce exposure in speculative stocks with weak fundamentals in case of bounce back.

Top 3-5 stocks that investors can buy in the coming July series?

July would see the beginning of the first quarter results where the full extent of margin pressure would be visible.

Accordingly, we expect an increase in stock-specific volatility during the period. Keeping that in mind, we expect a positive trend in ICICI Bank, Reliance Industries, and Bharti Airtel.

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