Worried about smallcap froth? Nilesh Shah explains it in 4 points
Nilesh Shah believes there is some froth in certain pockets of the markets, where low floating stocks and concentrated counters are trading at exorbitant valuations.
«These valuations do not make sense from an ordinary point of view,» said Shah, who heads Kotak AMC, in a chat with ETMarkets.
«My request to investors will be, number one, be aware that markets are optimistically pricing everything. There are fundamentals, sentiment, and liquidity, and hence these valuations. But these valuations are factoring in everything working properly,» he said.
Despite a stellar run in the past few years, small and midcap stocks are in no mood to slow down going by the trends of the first six months of this year. The Nifty smallcap index is up about 21% this year.
In his second piece of advice, Shah said investors to moderate return expectations as the kind of returns generated in the last one year or since Covid days is an exception that is unlikely to sustain going forward unless the market enters into a bubble.
Further, making his third point, he said that there was a wide gap between large, mid, and small caps in terms of performance, and that gap is likely to narrow down substantially.
«When you are investing, do not look at past performance to invest, look at future potential. Many of the companies at this valuation will have to perform tremendously. I doubt they will be in a position to achieve that in many cases. There will be some exceptions, but many may not,» Shah said in his fourth request to investors.
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