Small, Midcap Stocks: Harsha Upadhyaya, Chief Investment Officer at Kotak Mahindra Asset Management Company, said that small caps still carry valuation
risks because their earnings have slowed down more than expected over the last few quarters. Speaking to ET NOW, Harsha said that both small and certain midcaps appear stretched in valuation as he advised investors to be cautious while placing their bets. "I think clearly the value worries on small caps and to certain extent even midcaps is playing out. As we have seen over the past couple of quarters, the earnings in small cap segment has not been more than what everyone anticipated. So to that extent, the valuation risk still exists in case of small caps. In some selective midcaps as well, the valuations are on the higher side," he said. Harsha said that whenever market goes into a correction mode, "there will be some nervousness in these segments and that is where we are again seeing selling pressure".
Small Outlook For 2026
To a question on how smallcaps could perform next year, he said that the vulnerability on small caps could continue because this is the segment which is still trading at about 40 to 45 per cent premium to a long-term 10-year average on a historical basis.
"If you look at earnings expectations for small caps going forward for the next couple of quarters, it is unlikely that we will get to see anything different than what we have seen for the past couple of quarters. Clearly, there is valuation risk in small caps despite the correction that we have seen in 2025," he said.
Recovery In Earnings
Large and midcaps, he said, are expected to show some bit of recovery in terms of earnings growth. "It will not be a V-shaped recovery but we can expect a decent recovery. So in my opinion, large and midcaps will continue to be the places to bet rather than small caps."
Within the large cap pack, Harsha said that he is positive on banking, financials and consumption from a sectoral perspective.
Pullback Rally In IT
IT, according to Harsha, is not on the radar where "we have very large positions" but there could be a pullback rally in IT as it has underperformed significantly over the last 4-5 quarters.
When asked what one should to avoid in the current market set up, Harsha said that his tilt has been more towards domestic
businesses because the domestic growth has been more resilient as compared to global oriented sectors and businesses.
Within domestic businesses, "I don't think there is a pocket which is very attractive from a valuation perspective or very superlative in terms of growth," Harsha saod.
"So my view is not to take very large sectoral bets at this point of time. You need to be more stock specific. The rally whenever we see, will not be very uniform across sectors and there will be winners and losers," he added.
VIDEO
(Interviewed By Ayesha Faridi, Executive Editor, ET NOW & ET NOW Swadesh)
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
