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Below The Unveiling Market Resilience By Somnath Mukherjee, CIO & Senior Managing Partner, ASK Private Wealth.

From the CIO’s desk

“May you live in interesting times” – thus goes what the Chinese believe is the best benediction a new-born can be given. It would seem the present generation has been blessed three times over! In the current decade itself, barely three years into it, we have faced a once-in-a-century pandemic, a European war (in Ukraine) with global participation, emergence of a new super-power (China) challenging the incumbent and now a potentially catastrophic conflict in the Middle-East. There are seven more years to go in this decade, and several are perhaps wishing for somewhat less interesting times during that period!

Markets have been remarkably resilient

Despite volatile geopolitics playing out across the board, capital markets have been remarkably resilient.

Figure 1: Markets have broadly moved up despite geopolitical uncertainties

Major markets have shrugged off both tightening US interest rates and geopolitical risks. After a major meltdown last year, US markets have led. India hasn’t done badly either. Part of investor sanguine-ness is due to realization that wars don’t have much lasting impact on markets.

Figure 2: Geopolitical events and their impact

As can be seen in the table above, barring the two world wars, major conflicts have not really had any adverse market impact. If anything, some wars could have led to fiscal pump priming that propped markets up.

Indian Equities – Well-priced, But Earnings Keeping Up

There has been persistent fears of earnings tapering off in India. But fears have been found to be unfounded, so far. Nifty earnings are on track to end this year with high-teens/near-20% levels of growth. High frequency indicators at the beginning of the festive season – travel, cars, consumer durables, GST, bank credit – are all heavily in the “green”. The momentum is with the upper hand of the K, but even a small upper-hand is a large number in absolute terms for India.

Mid-cap Valuations – Much Ado About Little

Over the last couple of months, there have been persistent fears on valuations of Small and Mid-Cap (SMID) stocks. While there is some intuitive appeal to the fears, data doesn’t support the same. When large part of the market is on one side, its usually not a great side to be on. Too many people are cautious, barring retail investors. Neither Earnings not valuation multiples are supporting the fear case on SMID.

Figure 3: Valuations of both large and mid-caps are closer to their historical average

Figure 4: Earnings potential placed higher for mid-caps at present

In a nutshell, SMID have similar comparative valuations as large-caps, both at historical and at relative levels. But they are offering better growth profiles than large-caps. There isn’t a great daylight on relative risk that is visible for us to make an allocation call.

There is some more justified apprehensions about absorptive capacity of SMID markets, given the large AUMs being collected by MF/PMS/AIF structured around SMID themes. However, managed fund AUMs still comprise a relatively modest 10-11% of total free float of SMID space. Ergo, while a little stretched at specific fund levels, there isn’t a market-level issue on SMID.

If anything, the recent blip in markets (post the conflict in Gaza) saw the small-cap index outperform Nifty, while Mid-cap was broadly in line with Nifty

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