Investors should moderate their return expectations, says Mirae Asset CIO

Neelesh Surana, chief investment officer at Mirae Asset MF, who oversees ₹1.5 trillion in equity assets, explains how investors should navigate current market volatility, his outlook, and why the fund house is launching a small-cap fund now. 

Here are some excerpts from an interview.

What is your outlook on the markets?

The rally that began around March 2023 has now seen its first serious drawdown, with the Nifty 500 Index correcting by about 15%. Sectors that experienced significant gains over the past two years saw sharper corrections, thereby adjusting previous excesses.

Concerns around domestic GDP growth and corporate earnings have weighed on investor sentiment. Both GDP growth and corporate earnings were soft in the September quarter and could continue to be weak in the December quarter. 

On the global front, the probable impact of US policies under the new Trump administration has played a significant role in FPI outflows, as these policies have implications for global interest rates and the strength of the US dollar.

FPIs have sold a massive $19 billion since October 2024, including more than $7 billion in January alone. Of course, the full extent of FPI selling has been absorbed by DIIs, creating a sharp contrast between the actions of these two broad sets of investors.

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We believe the current GDP slowdown is not structural but cyclical. We expect both fiscal and monetary measures will help boost GDP growth by almost a percentage point above current rates. 

On the monetary policy front, liquidity infusion, interest rate cuts, relaxation of restrictive lending norms, and favourable currency movements could help improve growth. Valuations, at about 17 times estimated FY27 earnings per share, are also now reasonable, with froth largely removed during this short period of correction. Investor flows through mutual funds remain robust. Overall, we are more constructive now, and we believe that moderate returns in the low teens are achievable over the next 3-5 years.

What are your expectations from the upcoming Union Budget?

On the fiscal side, investors will keenly watch the budget for measures to arrest the ongoing cyclical slowdown without diluting macro stability. These could include measures to increase urban consumption via a tax rejig, expansion of production-linked incentive schemes, and a continued thrust on capital expenditure.

How should investors navigate this period of market volatility?

We believe India has strong and sustainable drivers for secular growth, and thus our view on equities is constructive. We would advise investors to have a well-crafted and balanced allocation towards equities, with a long-term commitment for the next few decades.

Investors should aim to invest in a disciplined way, with a long-term time frame and moderate return expectations. The expected returns should be in the low teens over the long term. Systematic investment plans (SIPs) are the most efficient way to minimise the effects of market volatility. New investors could also consider investing in hybrid funds that allocate assets across classes.

Why is Mirae Asset MF launching a small-cap fund now?

There are three main reasons for this.

• Increased opportunities in small  and mid caps: The number of companies in these segments has increased significantly, offering better representation across various sectors. Many businesses today are not represented among large-cap stocks. For instance, sectors such as capital markets, hospitals, chemicals, pharma-linked CRAMS (Contract Research & Manufacturing Services), clean energy, capex-oriented sectors, real estate and home improvement have limited exposure in the large-cap space. This is a result of many new IPOs, the shift from the unorganised to organised sector, and strong fund flows—all of which could continue, making these companies unlikely to feature in the top 250 companies by market cap (the large- and mid-cap segments).
• Potential long-term returns: The 20-year CAGR in both earnings and returns for small caps is around 16%. We still believe long-term wealth can be created if businesses are identified early, given their higher potential for earnings growth.
• Filling a gap in our offerings: Lastly, the launch addresses an important gap in our offerings.

The increasing relevance of small caps is not solely about valuations. With the continuous influx of new businesses being listed on exchanges, companies that initially qualified as large-cap stocks (the top 100 companies by market cap) may need to make space for these new listings. As a result, new listings will push existing companies down the market capitalisation ladder, which in turn will widen the mid cap (101st to 250th by market cap) and small cap (stocks beyond the smallest mid caps) universes. 

Mutual fund flows into these segments have also increased, further enhancing the importance of these categories.

What about froth in mid and small caps?

Froth in valuations was more prominent in high-growth sectors  – such as industrials, capital goods, EMS, capital markets, etc – across market caps. However, the investable universe is much larger now. For instance, we now cover about 600 companies, compared to 300 five years ago. Even if only a small percentage of these companies are good and reasonably valued, a decent diversified portfolio can be built.

Which sectors are you positive on?

The banking sector had already started correcting even before the broader market correction. While there are specific challenges of delinquencies related to small cohorts of unsecured loans, the overall balance sheet profile is solid. Current valuations in the banking sector already factor in some near-term challenges, which we believe are not structural or long-term. In addition, banking stocks have borne the brunt of massive FPI selling over the past few months.

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Healthcare is another sector on which we remain optimistic, driven by the ‘Make in India’ initiative, stable cash flows, and benefits from currency movements. Additionally, global shifts such as the ‘China Plus One’ strategy and US policies such as the Bio Secure Act should provide further support to the sector.

We are also positive about the mass consumption and discretionary sectors from a medium- to long-term perspective. Some parts of the mass consumption space have not fully recovered since covid. Top line growth in these sectors has been quite erratic. However, with inflation stabilising and increased government support to direct more funds toward consumption, we expect to see more stability in this space.

Do you remain positive on large caps?

Valuations of many large caps are now reasonable, and so we are positive. Additionally, when FPI flows reverse, it will further benefit the space. However, unlike small and mid caps, the large cap universe is now relatively small with just 100 companies, which does not represent all businesses in the current economic landscape.

How do you see Trump 2.0 and other global factors affecting the market?

There will always be volatility and noise in the markets. However, India’s economy is relatively better positioned due to its inherent structure. About 70% of the economy is driven by domestic consumption, which insulates it from many external shocks.

The primary factor that affects India remains oil prices. A significant surge in oil prices or a major geopolitical event could pose challenges, although it appears that the current regime in the US is likely to encourage more oil production.

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Ultimately, domestic earnings growth is influenced by several factors beyond just global events. The primary factors affecting earnings growth are related to corporate profit margins, which are also being affected by an increase in disruption and/or more competition—factors that are not necessarily linked to GDP growth or global factors.

How do you see interest rates playing out?

Our core inflation remains stable despite the volatility in food inflation, which is driven by supply-related challenges. Thus, interest rates in India should come down. This should be considered alongside liquidity measures and possible adjustments to macro-prudential lending norms, which would help stabilise the banking sector and stimulate the economy.