A pedestrian is silhouetted as the Bombay Stock Exchange (BSE) building, center, stands the background in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

$2 Billion Advisor Loads Up on India’s Biggest Companies Even as Small Caps Outperform

(Bloomberg) -- Small- and mid-cap stocks in India are outperforming the big ones in recent weeks, after trailing for more than a year. For Karvy Private Wealth, loading up on the nation’s biggest companies is still the way to go.

The strategy is based on the premise that the biggest businesses will weather the volatility, induced by political uncertainty before next month’s national ballot, more so than their smaller counterparts. Larger companies also suffer from fewer corporate governance issues that worsened the sell-off in the nation’s mid-cap stocks last year.

“Larger companies have proven business models, are consistently profitable and have fewer corporate governance problems,” said Abhijit Bhave, chief executive officer at the Mumbai-based company with $2.3 billion under advisory and management. “We are advising a 70 percent allocation to large-cap stocks.”

$2 Billion Advisor Loads Up on India’s Biggest Companies Even as Small Caps Outperform

Some of Karvy’s peers have increased exposure to mid-cap stocks, lured by valuations that only recently were near the cheapest in five years relative to the benchmark indexes. The purchases have driven up the Nifty MidCap 100 Index more than six percent in March, putting the gauge on course for its best month since last April. The gauge closed 2018 with a loss of 15 percent, versus a 3.2 percent gain for the main NSE Nifty 50 Index.

To be sure, smaller companies have led the recovery in risk assets across the world, thanks to a dovish turn by central banks and optimism over U.S.-China trade talks. The MSCI World Small Cap Index is up 13 percent this year, versus a 11 percent rise in it’s large-cap counterpart.

Bigger companies offer a better risk-reward for investors, given the speed of the rebound in local small stocks, Bhave said.

“How much return do I want and how much risk can I take are key questions,” he said. “If I’m getting a 20 percent return with a lower probability of it going wrong, a bird in hand is better than two in the bush.”

Below are excerpts from the interview:

  • Markets move up and down but from a five-to-seven year horizon, it is a linear growth story and it is important to make hay while the sun is shining; Karvy expects the S&P BSE Sensex to touch 100,000 by 2025; the gauge rose to a six-month high of 37,535.66 Wednesday.
  • If you are a long-term investor, focus on the ‘E’ for earnings and ‘E’ for economy -- not ‘E’ for events. Elections, geopolitical tensions and oil-price moves come and go.
  • Selectively overweight on property. There’s opportunity in pre-leased commercial real estate, affordable housing, warehousing and student housing.
  • Prefer financial services sector, corporate banks, auto and select insurance and asset management companies.
  • In debt, avoid duration risk and invest in fixed-maturity plans or short-term bonds.

©2019 Bloomberg L.P.