BNP Paribas India had a year-end Sensex target of 52,000 but the market is already there. Abhiram Eleswarapu, Head-Equity BNP Paribas India, said the broader market outperformance has already happened to a large extent.
“The Nifty year-to-date is up 12-13 percent, while the mid and small caps are up 30-40 percent. So, my sense is that the small-cap valuation relative to the Nifty is quite high and it hasn’t been this high for a long time.
Moreover, the next few catalysts like earnings, taper announcements in the US could be negative for these smallcap names. So, I suggest, we ought to be selective in that area,” said Eleswarapu in an interview with CNBC-TV18.
When asked if there was froth in the market, he said, “Historically, investors looked at traditional metrics like PE or price-to-book but now they are starting to look at valuations relative to bond yields. Considering the market is expecting a well-telegraphed taper announcement couple of months down the line, the US bond yields are around 1.3 percent today, which is very low compared to 1.7 percent that they were in April.” “Lower bond yields are good for equities. So if you take a call that yields being where they are due to technical or temporary reasons then there is clear froth in the market. Otherwise, if bond yields were to remain exactly where they are then there is really no reason for big fall to happen,” said Eleswarapu.
According to him, the central point is that a lot is driven by what is happening in the US than what is happening here.
Making an additional point about mid and smallcap, he said, “We have seen significantly higher retail participation in the market in the last couple of years. Higher retail participation leads to higher mid and small valuations.” Eleswarapu added that when the economy reopens some of the money will be taken out of the market and will be put into businesses, therefore, one needs to be cautious on smallcaps, they look a bit frothy but not as much as the largecaps.For the entire discussion, watch the accompanying video.