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Investor this $1.5b fund warns investor against Beware of small cap’s and regulation, says Indian fund manager
With national elections set
to potentially shake up Indian markets this year, the $1.5 billion Matthews
India Fund has a bit of advise: don’t buy small cap’s or stocks that are easily
influenced by the government.
Large-capitalization stocks currently represent the most attractive part of the Indian stock market as valuation are broadly in line with historical averages and expectation of or future growth are achievable.
The Matthews India Fund has
reduced its holdings of mid-sized and small stocks to about 62.6 per cent of
its total portfolio as of December 31 from 73.5 percent at the end of 2016,
data from its annual filings show. The fund, which has returned an average of
15 per cent annually over the past five years versus about 12 per cent for the
S&P BSE 100 Index, also has moved away from industries that are highly
regulated or at risk of government intervention. Government stability is key.
A government formed with the
support of too many small political parties lends itself to instability and
dampens the confidence of businesses at large to make the future investment’s
necessary for growth and innovation,” the fund manager wrote in an email.
Indian investor’s are getting jittery about the prospects for the reelection of Prime Minister Narendra Modi. While Modi’s policies, including a cash ban in 2016, helped fuel equity investment, confidence in the economy has dwindled amid his failure to create jobs and address distressed farms.
The S&P BSE Sensex Index has managed a gain of only 1.4 per cent so far in 2019, slightly extending a 38 percent, three-year rally. Smaller stocks have already started to decline, with the S&P BSE Small Cap Index shedding 24 per cent in 2018. This could spell trouble for the market overall.
As real estate and gold have under performed, there has been a tremendous shift in the type of savings to financial assets,” the fund manager said. “This has led to consistent inflows in equity mutual funds over the past two to three years. If small and mid-cap stocks continue to under perform, however, there is a risk that equity inflows turn to outflows, which might lead to a sharp correction in stock prices.”
Markets are unlikely to have a runaway rally in the next few months, given that we have the General Elections in May. All kind of predictions are holding, with even many now predicting the possibility of a weak coalition. The outcome of the elections remains difficult to predict and hence it is good to look at stocks with a good dividend yield. Here are a few stocks that could have limited downside risk, because of their dividend yields.
