Most of the midcaps would go beyond their earlier peaks by next year, said ace investor Porinju Veliyath, adding that the midcaps will outperform HDFCs, Bajaj Finance, HUL and TCS by significant margin.

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Veliyath, managing director, Equity Intelligence India said that structural change in Indian economy was leading to pain in the market.

Pointing out at the challenges, Veliyath said, "The legal system in India is very poor. This is the biggest challenge when investing in small and midcaps and that is why one has to be very smart and extra effort is required to identify companies.

Here is the full transcript of Porinju Veliyath's interview with CNBC-TV18:

Is there a bit of a regret in loading up in too many midcaps and small caps last year or you think this is a phase and it will pass?

The pain is not only for the stocks, even the fund managers have the pain but I don't regret, things happen like this. I am a fund manager who has been delivering 45.2 percent CAGR for the last five calendar years. This year we are down, we are the worst performer among the fund management companies in India.

It is true that this was much beyond expected kind of correction. It is also true that there was euphoria. Small and midcap stocks had been sustainably going up for the five years. The natural tendency of lot of people is to come at the peak of the markets, big money comes in at that point of time, that euphoria nobody will rule out.

Your portfolio is still loaded with midcaps and small caps. Given the kind of environment that we have, is it time to perhaps move into some of the large caps just to safeguard the investor interest right now?

No, this is a time for midcaps and small caps. After this big fall I think this is the most exciting time when I look back in the last five years. Now is the time to really look into and load, some of the very selective of course. I don't want to generalise too much. Selective mid and small caps- it is a wonderful time to pick with a very high margin of safety than the top quality stocks today.

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If we were to have the same conversation say same time next year, do you think that the midcaps would have recovered?

Most of them would go beyond their earlier peaks and they will outperform this current HDFCs and Bajaj Finance or HUL or TCS by significant margin.

When are you expecting this sort of pick up to take place in the midcaps, is it going to start say by the end of this year, when do you anticipate the recovery to come through?

It is overdone already, so it can happen any time, it can start tomorrow, maybe Monday, I don't know. Some of the stocks have been punished excessively. We have around 3000 companies traded in the market today in India, 1700 companies have gone down beyond 40 percent, 1300 companies have fallen by 50 percent from the recent high, around 750-800 companies have fallen by 70 percent, so this is a huge unusual crash and the money is hiding, the money is attempting to hide behind the 15-20 stocks. This won't sustain.

How are your investors reacting? Are you seeing redemption pressure, are you seeing more inflows at lower levels, how has the investor behaviour been from the PMS community?

There is absolutely no redemption. Every month even in May and June we have net inflows. It is true that clients who have joined in last 8-10 months or maybe one year, when they look at the price today or NAV today, it is little embarrassing even for me but I strongly believe this is a passing phase and many of these stocks are going to go through new highs, I am very confident about them.

The problem is many clients have joined or invested in equities for the first time, they came at the peak and they don't understand market dynamics much.

One of the stocks that you had in your portfolio was UFO Moviez ... if you look at the volumes now, they have just dried up, almost 800-900 shares. A lot of falls in midcap is now happening on very low volumes, there is almost no exit, is there a risk of something like 2008-2009 playing out in the broader market where stocks fall 70-80 percent and some of them never go back to their previous highs?

When you talk about UFO Moviez, it is a wonderful company with a relevant business model. I am not recommending the stock but what I am trying to tell you is that low volume will create that 40-50-60 percent upward movement from here in the next one year without volume and it will be very sharp movement also. So, that is good, I like it that there is no volume at lower levels. The crazy selling, panic selling, irrational selling is coming down, so it is good for the market.

First Published:Jul 20, 2018 11:44 AM IST