Midcap and smallcap stocks likely to outperform over next three years: Sandeep Tandon
We can expect double digit returns both from midcap and smallcap space, says the CIO of Quant MF.
By 
| Updated:
| Updated: 
ETMarkets.com
For the next three years, if the global thesis continues to move towards value as compared to growth, the outperformance of smallcaps and midcaps will continue, says Sandeep Tandon, CIO, Quant MF.
If somebody asked you how to get rich in the next one year, what would be your advice? Any stock or sector that you think is worth betting on?
Going forward, this is the time to build a portfolio which is broadly diversified as compared to a skewed portfolio. In the last many years, a skewed portfolio has delivered extraordinary returns for various reasons. Going forward, when the market is in the process of discovering new names, as a strategy, you should have a well diversified portfolio. There should be more value stocks in your portfolio. You can also have a lot of commodity stocks despite a move up there and are good to be bought on dips. We believe the commodity cycle is on the up move and I am very constructive on anything related to the agriculture space. Maybe the story of the decade is unfolding in the agri space. These are the spaces which you should identify. Also identify stocks related to the capex cycle if you get it at the right valuation and stocks which are under owned and have delivered in the past.
Which way would you lean in the pharma space? It is not a homogeneous basket. There is Divi’s which is into APIs; Dr Reddy’s which is a play on Europe and India; Aurobindo Pharma which is a play on the US and injectables and hopefully vaccine; Cipla is a pure play on respiratory. All models are completely different.
From a medium term and even a longer-term perspective, API and CRAM stories will continue to perform. The only challenge to a stock like Divi’s is that it also falls in the most admired category. It has delivered extraordinary returns in the last many years. So we have to identify names in this space which can qualify for this category which still has the potential to deliver a consistent return. We are more optimistic about the domestic pharmaceutical companies. Historically, pharma which is export centric, has delivered extraordinary returns till 2015 and then some of the companies have faced a lot of FDA issues, which they are still facing. We like to look at the names which have been beaten down significantly and have a significantly large domestic presence. Those are the stocks we are looking at currently for our portfolio.
Midcap and smallcap space has the potential to outperform over the next three years. Smallcap has outperformed mid and large cap in a big way. That thesis will continue because we find value in the smallcap and midcap space. So, for the next three years, if the global thesis continues to move towards value as compared to growth, the outperformance of smallcaps and midcaps will continue. It will be premature to quantify in terms of percentage but if you are a medium to long term perspective investor, a significantly large exposure should be there in this space as a strategy for the next three years.
In terms of the recovery theme and push on infrastructure, what about real estate? Do you see ancillary plays benefit from the kind of demand that we are seeing there?
Definitely, real estate is a part of the category which was neglected and beaten down for a while. This sector had peaked in 2008. All the large cap companies in this sector had peaked way back in 2007-08. We remain quite constructive on both the real estate and even building material space. During the pandemic, when most of the people stayed at home and got interested in improving their house quality. As a result, the building material business has picked up in a big way. So it is not just about cement or metals, the building space which is the allied industry of real estate, should also do very well.
Are we looking at a higher single digit/double digit returns scenario?
Since we have seen more than 100% return in the indices, everybody has to prune down that expectation. Last year was an extraordinary environment. The market also recovered from initial lows and that should not be the benchmark like our small cap fund that delivered a 200% return but that should not become a benchmark going forward. But one can expect double digit returns both from midcap and smallcap space.
If somebody asked you how to get rich in the next one year, what would be your advice? Any stock or sector that you think is worth betting on?
Going forward, this is the time to build a portfolio which is broadly diversified as compared to a skewed portfolio. In the last many years, a skewed portfolio has delivered extraordinary returns for various reasons. Going forward, when the market is in the process of discovering new names, as a strategy, you should have a well diversified portfolio. There should be more value stocks in your portfolio. You can also have a lot of commodity stocks despite a move up there and are good to be bought on dips. We believe the commodity cycle is on the up move and I am very constructive on anything related to the agriculture space. Maybe the story of the decade is unfolding in the agri space. These are the spaces which you should identify. Also identify stocks related to the capex cycle if you get it at the right valuation and stocks which are under owned and have delivered in the past.
Which way would you lean in the pharma space? It is not a homogeneous basket. There is Divi’s which is into APIs; Dr Reddy’s which is a play on Europe and India; Aurobindo Pharma which is a play on the US and injectables and hopefully vaccine; Cipla is a pure play on respiratory. All models are completely different.
From a medium term and even a longer-term perspective, API and CRAM stories will continue to perform. The only challenge to a stock like Divi’s is that it also falls in the most admired category. It has delivered extraordinary returns in the last many years. So we have to identify names in this space which can qualify for this category which still has the potential to deliver a consistent return. We are more optimistic about the domestic pharmaceutical companies. Historically, pharma which is export centric, has delivered extraordinary returns till 2015 and then some of the companies have faced a lot of FDA issues, which they are still facing. We like to look at the names which have been beaten down significantly and have a significantly large domestic presence. Those are the stocks we are looking at currently for our portfolio.
As benchmark indices remain volatile, analysts are recommending traders to be stock specific, avoid aggressive shorts and stay cautious. Besides the increasing Covid cases in certain parts of India, traders are also worried over the US 10-year yield which is firm at around 1.62%. All eyes are now glued on the outcome of the Federal Reserve meeting tonight.
Here is a handpicked collection of 10 stocks that analysts believe can deliver impressive returns in the next few weeks:
Midcap and smallcap space has the potential to outperform over the next three years. Smallcap has outperformed mid and large cap in a big way. That thesis will continue because we find value in the smallcap and midcap space. So, for the next three years, if the global thesis continues to move towards value as compared to growth, the outperformance of smallcaps and midcaps will continue. It will be premature to quantify in terms of percentage but if you are a medium to long term perspective investor, a significantly large exposure should be there in this space as a strategy for the next three years.
In terms of the recovery theme and push on infrastructure, what about real estate? Do you see ancillary plays benefit from the kind of demand that we are seeing there?
Definitely, real estate is a part of the category which was neglected and beaten down for a while. This sector had peaked in 2008. All the large cap companies in this sector had peaked way back in 2007-08. We remain quite constructive on both the real estate and even building material space. During the pandemic, when most of the people stayed at home and got interested in improving their house quality. As a result, the building material business has picked up in a big way. So it is not just about cement or metals, the building space which is the allied industry of real estate, should also do very well.
ADVERTISEMENT
Are we looking at a higher single digit/double digit returns scenario?
Since we have seen more than 100% return in the indices, everybody has to prune down that expectation. Last year was an extraordinary environment. The market also recovered from initial lows and that should not be the benchmark like our small cap fund that delivered a 200% return but that should not become a benchmark going forward. But one can expect double digit returns both from midcap and smallcap space.
Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
Bookmark or read stories offline -
Download ET Markets APP
Download ET Markets APP
ADVERTISEMENT
