ETMarkets Smart Talk: Small & Midcaps in bear market! Rajkumar Singhal shares 4 key stock-picking criteria

“Small and midcaps have been hit hard—Nifty Smallcap 100 is down 21%, valuations remain above long-term averages, and earnings disappointments have led to downgrades,” says Rajkumar Singhal, CEO, Quest Investment Advisors.

In an interview with ETMarkets, Singhal said: “With earnings likely to recover in CY25, the pain in small and midcaps may ease. A selective bottom-up approach is key—focus on quality businesses with strong balance sheets and sustainable growth,” Edited excerpts:

Thanks for taking the time. February was highly volatile amid trade war fears and FII selling. What are your views?

Trade war concerns have persisted since President Trump’s election, but the recent market weakness is largely domestic.

Overvaluation, especially in mid and small caps, and weak corporate earnings have weighed on sentiment. A slowdown in rural and urban consumption, along with tightening credit, has added to the pressure.

Since peaking on Sept 24, Nifty50, Midcap, and Small Cap indices have corrected 14%, 18%, and 21%, respectively, with FIIs selling $37 billion.

However, early signs of recovery are emerging—high-frequency data like electricity consumption and logistics show improvement, RBI has begun easing monetary conditions, and government capex is picking up post-elections.

While markets may remain subdued until March-end, the outlook looks better thereafter.

How significant are trade war fears, and what impact do you see on markets and sectors?

Trade tensions are real but hard to quantify at this stage. Trump is known to use tariffs as a negotiation tool, but the current scenario is more complex—China’s tech rise and broader geopolitical frictions add uncertainty.

The final impact depends on how these negotiations unfold. Investors should focus on long-term fundamentals rather than short-term volatility.

Do you see an earnings recovery in CY25?
Yes, we expect earnings recovery in CY25, supported by (1) strong GDP growth, (2) improved inflation and fiscal outlook, and (3) a stable BoP and CAD.

The recent slowdown was cyclical, driven by credit tightening and election-related fiscal moderation. However, headwinds are reversing—government capex is rising, the rate cut cycle is resuming (with another cut likely in April), and liquidity injections and recent tax sops are in play. These factors should drive earnings growth in the coming quarters.

Small & midcaps are in a bear market. How should investors approach this theme?
Small and midcaps have been hit hard—Nifty Smallcap 100 is down 21%, valuations remain above long-term averages, and earnings disappointments have led to downgrades.

FPI selling, initially triggered by China’s stimulus and later by U.S. market strength, has exacerbated volatility.

That said, macro conditions are improving—GDP growth remains strong, monetaryl policy is easing, and more rate cuts are expected.

With earnings likely to recover in CY25, the pain in small and midcaps may ease. A selective bottom-up approach is key—focus on quality businesses with strong balance sheets and sustainable growth.

Where are the best investment opportunities in 2025? How should investors pick stocks trading at a discount?
Market corrections are more cyclical than structural, and H2FY25 should outperform H1FY25. The Union Budget 2025 has provided a fiscal boost, especially with ₹1 trillion in income tax benefits.

Stock selection criteria:

● Earnings visibility – Companies with strong growth potential.
● Valuation comfort – Stocks trading at reasonable levels.
● Balance sheet strength – Low leverage, strong cash flows.
● Sectoral tailwinds – Industries poised for growth.

Key sectors to watch:

● Consumer-facing stocks – Auto and discretionary sectors should benefit from increased disposable income and festive demand.
● Capital goods – Strong government capex and post-election recovery in order flows.
● Cement – Positive operating leverage, lower fuel costs, and margin expansion.
● Pharma & Healthcare – Sustained growth from new product launches and regulatory tailwinds.

India Inc. is well-positioned for a recovery, with FY26 expected to bring strong earnings growth.

SIPs have hit ₹26K crore for two months in a row. Could they slow down if markets lose momentum?
SIP slowdown is always a risk. We should look at net inflows into equity mutual funds that continue to remain strong, indicating resilient retail participation. For now, there’s no major concern about a tapering in SIP/equity flows.

How do you view Gold & Silver investing in 2025?
Gold thrives in uncertainty, and 2025 presents several tailwinds—trade tensions, inflation concerns, and central bank buying (especially China). All these things along with expected U.S. rate cuts makes Gold as an asset class quite attractive. Major global banks project gold prices around $3,100/oz by year-end. Silver, often following gold, could see a similar upside.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)