Here Are Four Sectors Retail Investors Should Approach With Caution

Amidst the budget about to be tabled by the third week of July, and over two dozen IPOs to hit the market in upcoming months, it is important to carefully assess sectors that will see an uptick. Equally important, it is to identify sectors that can pose your capital higher risks, so that you require more caution when investing in them.

Industry experts expect MSME and related sectors among sectors to rebound due to a possible governmental boost in the upcoming budget. While much enthusiasm is around promising sectors including infrastructure, banking and financial services, automobiles,  EVs, etc., let's all take a look at sectors that you should approach with caution.

On a larger note Farooq Nabi, Director & Unit Head at Anand Rathi Wealth Ltd, says " Retail investors should avoid making sector-specific investments in the short term (less than a year). It may be wise to consider flexicap and large-cap categories of mutual funds, using a staggered approach. If you are determined to pursue focused investment, it is best to avoid riskier options such as PSU and Defense."

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Expert Take on Sectors To Approach With Caution

Small and Mid-cap Space

Says Anand K Rathi, Co-Founder of MIRA Money, "Many small and mid-cap companies are experiencing significant price growth due to high liquidity, even when their quality is questionable. This situation is highly risky for rental investors and is not sustainable."

Farooq Nabi gave another perspective.  On a medium-term outlook (1-3 years), Farooq Nabi expects robust earnings growth across Nifty 50, Nifty Large Cap 100, Nifty Mid Cap 150, and Nifty Small Cap 250, ranging between 11 to 22 per cent during 2024-25 and 2025-26. With reasonable valuations and no major froth in the market, investors can anticipate steady returns, especially in the large-cap and small-cap segments.

"The mid-cap segment, showing some froth, is also expected to deliver decent returns, albeit slightly below the long-term average. Note that we are in a structural bull run, and periodic corrections are part of it," Nabi said.

Public Sector Undertakings (PSUs) Sector

Investment managers since March 2024 have been advised to approach select PSU sectors with caution. PSU space has seen considerable volatility since then, and the S&P BSE PSU index saw a 4,000-point dip after the exit poll results came. However, it was revived in a few ways.

Anand K Rathi says, "While the government's focus on Public Sector Undertakings (PSUs) is leading to some revival, not all PSUs will improve just because the government is involved. Investors should be cautious if failing PSUs are valued highly."

Many PSUs are gaining value due to the perception that they will revive, but this needs to be supported by solid fundamentals. For example, if you plan to invest in the manufacturing sector, it's important to assess whether the optimism surrounding sectors like government-focused PSUs and defence has already been factored into the prices. If the positive expectations for the next 2-3 years are already priced in, the high price-to-earnings ratio may limit potential returns, even if earnings perform well, Rathi said.

Says Harshad Borawake, Head of Research & Fund Manager, Mirae Asset Investment Managers, "The value of any company is determined by the fundamentals like longevity of growth, earnings growth, profitability, return ratios etc.  In some pockets of PSUs, there could be a concern on valuation or pace of rise in value, however over time markets will price it in sync with its cash generation capability."

Rural Consumption

Rural consumption is another space that retail investors should approach with caution due to the shortfall in rain.

Rathi said, "Although there are signs of improvement in rural consumption, with lower interest rates and controlled inflation, the monsoon season is not as promising as expected. The current shortfall is 20 per cent despite the IMD's forecast of 106 per cent above normal. This raises concerns about rural economic growth, which is crucial for investments based on the premise of increasing rural consumption. The resulting stock corrections could be substantial if rural consumption does not improve as anticipated."

Urban Consumption

According to Tata Mutual Fund's June equity outlook released last week, urban consumption after significant growth in 2022 is slowing due to the impact of inflation and interest rates and thus has a negative outlook.  The fund house gave the urban consumption sector a negative outlook.

On urban consumption being given a negative outlook, Borawake said, "Consumption in India has been witnessing a K-shaped recovery since the pandemic. Rural and poor households in urban are still recovering from the pandemic blow, high inflation & poor monsoon. In the last few months, rural growth for the FMCG sector has started outpacing urban due to the low base effect – this phenomenon should continue in FY25. But this is more to do with recovery in rural on a low base rather than a slowdown in urban."