Hopes of earnings recovery, lower interest rate and a pick-up in economic growth have pushed the BSE midcap and smallcap indices to near record highs. This has led to some analysts express concern over the stretched valuations in broader markets, saying that they could be due for a correction.
Sunil Subramaniam, CEO of Sundaram Mutual Fund, however believes that midcap and smallcap shares are not yet overvalued and may extend rally further. (Watch)
"When the economy is on a recovery mode, midcap and smallcap stocks always tend to go up ahead of their earnings, and earnings always keep the faith," Mr Subramaniam said.
"The earnings growth of midcap pack is far better than largecaps," he added.
Mr Subramaniam further said that index valuations are not truly reflective of midcap stocks so investors should continue to stick to their allocations in select midcaps.
"The next leg of growth will be more broad-based than the last few years, which has largely been a cyclical bounce-back," he added.
The fund manager is particularly bullish on the retail finance sector as he expects the sector to benefit from a good monsoon, Seventh Pay Commission awards and the Jan Dhan scheme.
"We see OROP (One Rank One Pension), Seventh Pay Commission and a reasonably good monsoon to further boost the rural and urban consumption...The main driver of consumption is borrowing. The propensity of Indians to borrow to achieve a higher lifestyle is still at a very low level compared to the developed world," he said.
The fund manager is also bullish on the infrastructure sector. "We see private capex getting momentum in next 15-18 months," he added.