While China’s stock market went nowhere even as its economy grew manifold over the last 20 years, Sanjay believes Indian equity market will keep pace with our economy’s growth acceleration, as our growth model is far more well balanced across consumption, Govt spending and private capex.
Baroda BNP Paribas has launched its small cap fund after an18 month period of building up bench strength to do full justice to the small cap space. Sanjay says that though this segment has outperformed large caps significantly over the last year, there has been no PE re-rating as markets are only keeping pace with strong earnings growth. EPS growth projections going forward for small caps are stronger than mid and large caps – hence giving the confidence of healthy upside ahead.
Tracing back small cap outperformance cycles over the years since 2005, Sanjay says a typical outperformance cycle lasts around 2 years(550 – 740 days). We have thus far seen only 6 months of small cap outperformance over large caps. If historical cycles are anything to go by, we potentially have 15-18 months of this cycle still to go – which also ties in well with stronger earnings growth projections for the next couple of years for small caps – especially in a declining interest rate environment.
Baroda BNP Paribas’ small cap fund will be managed on GARP principles, will be benchmark agnostic, will be bottom-up focused and will seek to have 60-65 stocks in the portfolio which exhibit good visibility of 20-25%CAGR earnings growth prospects over the next 3-5 years.
Increasing mutual fund participation in small caps brings in higher intensity research into this relatively underowned space (institutional ownership). These inflows are also being matched by growing new listings (93%of new companies listed in the market are small caps) as well as rising market caps of existing small caps – thus adding depth that matches growing institutional interest.