Shankar Sharma Bets On Small And Mid Caps Even As Economy Slows

Small caps are largely devoid of influences of the macro, says veteran investor.

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Veteran investor Shankar Sharma is "extremely bullish" on small and mid caps aided by specific thematic tailwinds even as the global economy, beset by multiple headwinds, slows.

The next fiscal starting April 1 could potentially be disappointing in terms of headline GDP growth because India's exports are falling, and domestic consumption and rural demand remain weak, Sharma told BQ Prime's Niraj Shah in an interview.

That will affect large caps as they are a reflection of the macro, according to Sharma, director and founder, GQuant Investech Pvt. But while large caps will struggle to deliver big returns, small and mid caps will sustain given their independence from influencing the macro economy, he said.

So an individual investor "needn't worry about valuation premiums shrinking or expanding, especially after last quarter's soft GDP numbers," said Sharma, adding that it has reinforced his preference for small and mid caps.

Banking Crisis

Sharma sees similarities between the current banking crisis and the one in 2008. But unlike then, quicker resolutions by bank regulators is providing confidence, he said.

In a hurting market, an incident like the Silicon Valley Bank collapse or the Credit Suisse debacle will assume "bigger-than-life proportions" because of the unwillingness of the market to immediately overcome such situations, Sharma said.

Such incidents wouldn't have been treated with the kind of gravity they are being now if the markets were bullish, according to him. "The market is hurting at the moment. The banking crisis ... is getting its due attention and the tremors of worry won't calm down anytime soon."

Indian IT Services

Indian IT services has been hurting for a long time, Sharma said. In fact, Rajesh Gopinath's recent resignation as chief executive officer at Tata Consultancy Services Ltd. because of "quarterly pressures" communicates a grave commentary on the space, according to him.

It's a difficult time for the sector and it will undoubtedly be challenging to meet guidance, he said.

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Indian Startups

Sharma does not recommend newly listed Indian companies for investments. "A bigger problem will arise if they turn profitable because then standard valuation metrics will begin to apply and price to earnings will come into the picture," he said. "One doesn't need to take big risks to earn big money."

Watch the full interview here: