Mid- and smallcap mania could hurt investors and the economy, says Marcellus’ Mukherjea

The recent rush of money into small- and mid-cap stocks is making Saurabh Mukherjea uneasy — not just from an investor’s standpoint, but also from a broader economic one.The founder of Marcellus Investment Managers flagged what he sees as an imbalance in flows to smaller stocks. “What really worries me is the intensity and strength of flows into small and mid-cap AUMs, the amount of money they’re taking in, the lack of earnings growth, the giddiness of valuation,” Mukherjea said in an interview with CNBC-TV18.

He noted that the smallcap index has more than doubled in just three years — a run which is not backed by fundamentals.

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Mukherjea is more comfortable with large-cap quality stocks, which he feels are now sensibly valued after years of underperformance. “Large-cap quality, I think, is pretty reasonably valued. So the kind of things that we tend to like — HDFC Bank, for example — is sensibly valued,” he said.Despite the broader caution, Mukherjea isn’t entirely steering clear of the small and midcap space. Marcellus has been selectively adding names, especially in the specialty chemicals and pharma supply chain.

Marcellus has been selectively adding names, especially in the specialty chemicals and pharma supply chain. One such company is Acutaas Chemicals, a raw material supplier to Indian API (active pharmaceutical ingredient) firms, which he says is well placed to benefit from the expected rise in outsourced manufacturing and a potential US-India trade deal.

Marcellus continues to focus on steady compounders and is exploring private capex plays — a segment Mukherjea believes could see a meaningful revival over the next few years.

Mukherjea’s core portfolio at Marcellus hasn’t changed much over the years. He continues to back long-term compounders like HDFC Bank, Asian Paints, Divi’s Laboratories, Trent, and Pidilite Industries.

Outside of his core holdings, Mukherjea is watching the consumption space closely — but isn’t in a rush to add exposure. He believes a consumption downturn is underway, driven by weak household savings and high valuations. “Net household financial savings is at a 50-year low,” he pointed out.