Mid- and small-cap slide a big buying opportunity: Manish Sonthalia

Synopsis Veteran investor Manish Sonthalia views the current mid- and small-cap stock correction as a prime accumulation phase, comparing it to the post-Covid crash opportunity. He advises investors to carefully select IPOs and focus on rate-sensitive sectors, IT, capital markets, and bullion, while avoiding overvalued capital goods, railways, and defense stocks. As mid- and small-cap stocks continue to wobble under liquidity pressures, veteran investor Manish Sonthalia believes the current correction may turn out to be one of the best accumulation phases in years. When asked how investors should approach the rush of new listings and the volatility across the broader markets, he was unequivocal. “Absolutely. I think what do you do with the new money that is coming in and how do you deal with this flurry of IPOs, see all the IPOs are not bad and neither are they at very elevated valuation,” he said in an interview to ET Now. He noted that investors must sift carefully through both the primary and secondary markets, adding that many upcoming issues are best avoided. “Many of the IPOs are very-very overpriced and it is basically a listing gain, those should be avoided at all cost. Some are exorbitantly overvalued, they should be avoided at all cost.” Live Events Sonthalia argued for a balanced strategy that includes rate-sensitive sectors, IT, capital markets, and even bullion. “Keep some money in the portfolio for bullion, 10% to 15% because of the woes of the US dollar… valuations are the only case of worry as far as the stocks which are listed in the secondary markets.” Despite the anxiety around the recent correction, he believes the present phase closely resembles the opportunity that followed the Covid crash. “Stocks have already corrected 20-25%, more than 60-70% of the stocks have already corrected 20-25%. Maybe give it another 10%, but the upside is similar to what we saw… when we would have bought it in 2020.” He adds that investors will likely look back at 2025 as a period when quality stocks were available at “very reasonable valuation.” Where to Look in the Broader Market On sectors that could outperform, Sonthalia maintained that bottom-up stock picking is key in the SMID universe. “Sectors is basically generic to both the largecaps and the midcaps… rate sensitives, IT, capital markets, selectively infrastructure, these are the spaces to look at.” He flagged pockets that still appear stretched. “Avoidable sectors are the very high elevated valuations on capital goods, railways, defence… these are some of the areas which are still overvalued should be avoided.” However, he reiterated that growth, valuations, and management quality must drive decisions in mid- and small-caps. Fundamentals Strengthening, Not Weakening Sonthalia dismissed concerns that broader market fundamentals may be turning. “Yes, fundamentals are not deteriorating and they are only getting better… you are somewhere close to the five-year median valuations.” With the system in a liquidity deficit, he believes the SMID segment has corrected more than justified, but that the downside may now be limited. “Once that is taken care of, you would have already seen a floor and we should be headed higher.” Autos Enter a “Very Good Sweet Spot” The auto sector, especially two-wheelers and commercial vehicles, appears well-poised for a sustained upcycle. “M&HCV has already turned a cycle… Two wheelers in fact projected to have a very good second half of this year also and continued into the full year FY26.” He attributes this optimism largely to the GST cut from 28% to 18%, which he believes strengthens affordability and boosts demand. “Whenever you hit the affordability quotient, there is ample demand in the system… autos are in a sweet spot. Very good sweet spot.” Gold and Gold Financiers Hold Steady Despite volatile gold prices, Sonthalia does not foresee major stress for gold financiers. “You have seen some very good growth come in… going forward you should look at something like a 15% sort of a growth, nothing more than that.” Rising gold and silver prices, he added, support higher LTVs and larger ticket sizes. “Increase in gold or silver prices increases the LTV value… not a bad scenario for the gold financers.” (You can now subscribe to our ETMarkets WhatsApp channel) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. 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