The market is pricing in earnings growth recovery, says Kotak Mahindra AMC

“Market has three compartments: Sensex – it is at a lifetime high but midcap, as well as small caps, are both down between 15 percent and 30 percent from their respective lifetime highs in January 2018. So clearly, the market today is pricing in a recovery in earnings in largecap as well as midcaps as well as smallcaps,” he added.

In terms of growth, Shah said: “The September 2019 quarterly gross domestic product (GDP) growth will be lower and that is priced by the market. The market today is looking at recovery in growth as well as earnings based on the corrective steps taken by the government. The cut in corporate tax has definitely benefited a lot of full tax-paying companies; their earnings have increased by 10-15 percent straight. Secondly,  the Reserve Bank of India (RBI) has pumped liquidity into the domestic banking system and interest rates are being cut, the real interest rate burden on corporate India has declined over the period and should continue to decline going forward. Thirdly, a positive step like a large public sector undertaking (PSU) divestment on one side reduces fiscal worries, and on the other side also confirms the reform agenda of the government. So put all these things together, the market is expecting that in September 2019 we will see growth bottoming out and we will see a gradual recovery in the quarters to come and that will be reflected on corporate profitability across small, mid and large segments.”

Shah says this is the time to be cautious about valuation. What is looking very safe is not looking cheap and what is looking cheap from a valuation point of view is not necessarily safe except for the last few days' rally.

“We believe small and midcaps across a variety of sectors provide you that comfort on the valuation. One will have to be careful about valuations of the stocks, which they are investing in,” he added.