'Smallcaps not in extreme bubble territory'

Smallcap stocks across sectors have consistently exhibited higher earnings growth than large cap stocks over the past two decades.

This, to some extent, suggests that we are not in an extreme bubble territory, according to R VENKATARAMAN, chairman and managing director of IIFL Securities. In an email interview with Sundar Sethuraman, Venkataraman observes that markets will also receive support from monetary easing globally. Edited excerpts:

With the significant rally in the markets, there's a considerable amount of optimism embedded. Have the markets become overly exuberant, or does India's growth potential justify such a valuation premium?

The Indian economy is experiencing growth above 7 percent, and even in the worst-case scenario, it should comfortably remain above 6 per cent in the foreseeable future.

Given the relative stability of the rupee against the dollar, even gross domestic product growth in dollar terms is expected to be above 10 percent, surpassing that of other major economies. The National Stock Exchange Nifty earnings growth for 2023-24 (FY24) through 2025-26 (FY26), excluding oil, is projected to be above 14 per cent. This provides a robust springboard for future growth.

Hence, the seemingly stretched valuations are not inherently excessive. If anything, it is an opportune time to enter the market cycle.

Do you believe mid and small caps have become overheated? Several mutual funds have imposed restrictions on inflows into smallcap schemes. Would you advise investors to proceed with caution?