Mid and Small Cap Index : Euphoria or Big Bulls

Good Day Investors!!!

I must confess I have bearish view on midcaps-smallcaps for quite some time now. I never take such calls in haste and I am aware that I am not in business of making predictions but in business of managing risk in my client's portfolios.

Whichever way I slice and dice it my data analysis along with technicals and fundamnentals telling me this is a bubble of epic proportion that will be remembered after long time. We are looking at extremely frustrating phase in coming years. It will be worst for novice traders/investors who want quick money and havn't seen any major downside. The happiest people would be those who do SIP for long term keeping in mind India's growth story intact with Zero loss of emotional capital.

My call is based on 3 things:

• Economy is reaching overheated phase and earnings growth will be lower than expected. PE derating + low EPS growth can be killer combination.

• Monetary conditions will remain tight. Rates are cut during recessions not when economy is doing well. Even if are there are odd cuts here and there the liquidity will remain poor. Two other reasons why I don't see big rate cuts are-they hurt savers and lower mortgage rates can create frenzy in real estate crowding out middle class population. I would be surprised if 10Y Gsec dip below 6.5% in next 2 yrs.

• Big ticket purchase(housing, cars, travel) will slow down due to uncertainty in the job market. Recent data of Car manufacturers shows that More care in Yard than showroom as of last month. One of the reasons for big boom in big ticket purchase was massive wage hikes in 2021-22. Similary, lilquidity is drying up and it will drag market more than expected. All the assets class have run up a lot in last few years and it definitely need a break and overhaulign of the system.

Valuations 1 year back were what they were at the top of 2018. So its only got more and more ridiculous as the market has gone up relentlessly and without any breaks. I've personally shifted from Mid and Small Cap to defensive funds a month back. My system says that profit which is not booked is not a profit. My Long Term targets of Indian market remains the same for 2030 and beyond but current level looks like a bubble where new clients want to onboard every now and then and bus seems to be over crowded.

Stay Safe, control on greed and take a pause to run farther in long run.

Regards, GYC by Dinesh Aneja