Frothy valuations biggest risk; Fed may begin cutting rates from H2CY24: Madanagopal Ramu of Sundaram Alternate Assets

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Madanagopal Ramu, fund manager and the head of equity at Sundaram Alternate Assets believes the rich valuations in specific segments of mid and small-cap space are the biggest risk for the markets. In an interview with Mint, he said one can hold some cash at this time and invest in stocks with long-term growth potential during corrections. Crude price historically is a short-term cyclical factor and a difficult one to judge. We always see market corrections due to crude, typically, as an opportunity to invest and in portfolios, we make use of this correction to invest in some good opportunities, which we would’ve stayed away from due to valuations.

It’s important to judge how long crude prices could remain elevated and what is now going to be the peak. Given the global slowdown, it’s difficult to push a case for demand-led inflation in crude prices. Supply-led inflation in crude generally results in a short-term spike, so there is no risk to India's growth story beyond one to two quarters.

Election outcomes, crude oil price movement, and hawkish Fed are some short-term factors which can impact markets by 5-10 per cent maximum. But the biggest risk for markets is the frothy valuations in specific segments of mid and small-cap space. High growth built into the valuations in a few sectors in the mid and small-cap are in our opinion difficult to achieve.

This flow-driven rally in the mid and small-cap space seems to not be discounting the potential earnings disappointment that can come through in many sectors in Q3 and Q4 FY24. Rate cut in the near term looks difficult given the crude, hawkish fed, and domestic inflation. Interest rate cuts can be expected from the second half of the calendar year 2024 (H2CY24).