'Opportunity to create wealth is in small caps'

Summary: After a strong run and rising volatility, a seasoned CIO explains why markets are turning bottom-up again, where valuations now offer comfort, and why mid- and small-cap opportunities still matter despite near-term noise. A take on value, discipline and patience. After a year of frothy valuations and weakening earnings, Venugopal Manghat sees the market settling into a more bottom-up phase—one where leadership is absent, but opportunities are quietly emerging beneath the surface. The CIO–Equities at HSBC Mutual Fund, who manages Rs 38,500 crore across four schemes, including the 4-star HSBC Value Fund, believes genuine value now lies in pockets where corrections have already played out, and growth is normalising. His stance remains clear: mid and small caps continue to reflect India’s long-term opportunity set, even if volatility tests patience in the short term. Guided by disciplined frameworks and a steady value philosophy, Manghat breaks down where he finds conviction today and why. With markets at all-time highs and some pockets looking pricey, where do you still find genuine valuation comfort today and which areas make you cautious? After three or four years of strong market performance post-Covid, by September 2024, valuations had risen, and ownership levels had also increased quite significantly. But more than that, you have to look at valuations in conjunction with earnings growth and return on equity (ROE) expansion. Earnings growth was weak, and since September 2024, we have seen a slowdown at both the economy and corporate levels, which has made valuations look even more expensive optically. I think that’s been the cause of worry. We’ve seen a time correction play out in pockets. I still think valuations are reasonable, for example, in the financial services space, let’s say banks and NBFCs. I think valuations are reasonable, even in the tech sector. On a five-year relative valuation basis, we see valuations at a reasonable level, though again, I think growth has slowed down there. So, one needs to be careful. Also, in this market, many stocks have corrected significantly over the last year. Post-September 2024, the indices have remained flat to marginally negative. But if you go down into and outside the index, you see many stocks in pain, having corrected quite significantly. So, it’s a bottom-up market. I think leadership is not there at the moment, so one has to look for ideas where corrections have already taken place, valuations have become reasonable, and earnings growth is maybe returning to normalcy. HSBC Value Fund has generated a 7 per cent alpha over three years, though with higher volatility. How do you approach this risk–return trade-off in stock selection and portfolio construction, and is it an outcome of where you’re finding value today? The value definition we use is very different. There are multiple ways to look at value, and it’s loosely defined. We have stuck to our