Devina Mehra warns against chasing small caps and calls them a stock-specific play

Indian equity markets may not have posted outsized gains over the past year, but benchmark indices have shown resilience despite a challenging global and domestic environment. The Nifty has returned almost 10% on a total return basis in the past year, a performance that seems reasonable given the volatility that investors have faced. However, beneath the surface, market leadership is uneven. Large caps have clearly outperformed, while the small cap index has fallen by around 7%, leading to a big difference in relative returns. This difference has once again sparked debate about whether small caps are poised for a comeback or whether the recent underperformance is simply part of their natural cycle. Devina Mehra, chairman and chief executive of First Global, cautions against viewing small caps as a broad, homogenous opportunity. “The smallcaps are always a company-specific call. It is never a category call,” she said in an interview with ET Now.

She notes that sharp declines are inherent to the small-cap sector and are not exceptions. “The small cap index fell almost 78% in 2008-09. It took eight years to cross that high,” Mehra points out, adding that a year of decline should not be seen as a guaranteed trigger for a recovery. “It is not an aberration that the small cap index has fallen for a year and therefore should recover,” she explains.

On the broader market outlook, Mehra reiterates her long-standing view that investor sentiment often acts as a contrarian signal. “Sentiment is a counter-indicator,” she says, suggesting that periods of anxiety and pessimism are often the most important times to stay invested, while phases of comfort require more caution.

From a portfolio positioning perspective, Mehra emphasizes the consistency between what investors hold and what they would be willing to repurchase. At First Global’s PMS, the company remains overweight in autos and auto parts for almost two years, while remaining positive in the pharmaceutical and healthcare sectors despite a lull in performance this year. FMCG has also emerged as an area of ​​increasing exposure, supported by lower inflation, improving consumption trends and some margin relief from softer petrochemical prices.

Outside these segments, exposure to sectors such as chemicals and capital goods is largely driven by individual stock selection rather than sector-wide themes. Banking, however, remains an area where Mehra prefers to be cautious. While exposure has increased from historical levels, the portfolio is not overweight in the sector. “I am a nervous investor in banks and lenders,” she says, pointing to the debt nature of the sector and the greater likelihood of negative surprises.

She adds that it is extremely difficult to predict such risks from the outside. “It’s a highly leveraged industry. If you’re on the outside, you can’t predict where the next negative surprise will come from,” Mehra explains. Drawing on the history of the sector, she notes that while success stories like HDFC Bank and Kotak Mahindra Bank are often cited, several other licensed banks ran into serious trouble around the same time. “That’s the nature of banking,” she says, with investors ultimately betting on management decisions that don’t always turn out as expected.