Expect some correction but not as much as a bearcap scenario: Shankar Sharma

Shankar Sharma, VC and Joint MD at First Global, told CNBC-TV18 he expects some correction in the market but not as much as a bearcap scenario.

Nifty50 returns have been at 14-15 percent for the last few years, he said.

“So, I come back to our lake of returns theory, the return levels are very, very low. What we have seen is just the last 12 months of very good returns, but even with those, the lake levels are nowhere close to overflowing in terms of returns. Because for the smallcap and midcap end of the market, you need at least a 4-5 percent point higher long-term returns as compared to Nifty returns at around 14-15 percent on a long-term basis, which means that small and midcap (stocks) have to deliver 20 percent compounding for them to be justifiably part of your portfolio.”

“Even with this rally that we have seen this year and last year, small and midcap stocks are nowhere close to being at 20 percent CAGR over a 10 year period, which tells me that in the lake of return, return levels are still very, very low,” said Sharma.

“There will be corrections and, what you correctly pointed out, the market breadth is a worrisome thing, because you have only now the laggards in the large caps, the telecoms, and the banks, which have done nothing for the last several months; they are beginning to rally while really the better performing section of the market is actually in the negative, and that is part of the worry, without any doubt, which may lead to some degree of correction. But it is not a bear market,” he explained.

Sharma also cautioned investors against having small cap stocks as a bigger part of their portfolio.

“We will play everything but we don't end up believing anything. So we are playing this; we are making good money, but it doesn't mean that you're just going to put everything into small caps... I would caution against having small caps as a bigger proportion of your portfolios for the simple reason that the liquidity available in those spaces is very poor. We worry about our own portfolio quite a bit on certain positions because the positions have become fairly not large in terms of percentage of portfolio, but just in terms of the value that they occupy... just in absolute numbers," he said.

"While the trading volumes have not gone up by that much, there is a relative amount of higher risk you can see in a number of them across the board that you have liquidity constant in the small cap space... One should not as a prudent investor go and put all your eggs into one basket, because that basket is a very fragile basket. We have seen it crack very easily, very quickly, without warning. It is a risky space,” added Sharma of First Global.