Current risk-reward unfavourable; interest rates could be higher for longer: Asit Bhandarkar of JM Financial AMC

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Asit Bhandarkar, Senior Fund Manager – Equity at JM Financial Asset Management pointed out that over the past year, mid-cap stocks have surged more than 30 per cent, mainly due to a P/E re-rating. He advised caution in the short term due to rapid price and valuation increases, global challenges, and pre-election volatility, but remain optimistic about India's long-term growth potential driven by infrastructure upgrades and consumption trends. We have seen a sharp up move in excess of 30 per cent in the mid-caps versus nearly 20 per cent for large caps in the last 12 months.

Data suggests that a significant portion of this return has come from P/E (price-to-earnings ratio) re-rating. At JM Financial Mutual Fund, we draw more comfort from earnings-driven stock price appreciation. The impact of transient factors such as geopolitics, risk aversion, capital flows and excessive liquidity, then, gets mitigated.

Given the rather rapid rise in prices and valuations, we believe the market needs some time to digest the new prices in the context of the global macro challenges and likely pre-election volatility and some caution may be warranted in the short term. Longer term, we are very excited about the growth prospects for the Indian economy. Over the next decade, we expect a rapid rise in the stature of the Indian economy and businesses amidst the global peers driven by massive infrastructure upgrades and improving consumption trends.

Markets are on a tear globally, while cheering the trend of lower inflation in the USA and India as well. Partial credit for the inflation readings goes to a higher year-on-year base. Data on employment, housing starts, rental housing, industrial production, energy consumption, etc.