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Small Caps Aren't a Comeback Trade, Says Devina Mehra
Devina Mehra, the influential founder, chairperson, and MD of asset management company First Global, has issued a stark warning to investors regarding the outlook for small-capitalization stocks. Addressing the notion of a guaranteed comeback for these companies in 2026, Mehra firmly rejected the idea, emphasizing that small caps should be approached as company-specific investment opportunities rather than a broad thematic bet.
2025: A Challenging Year Under the Surface
Mehra highlighted that despite headline indices suggesting a positive end to 2025 for the Indian markets, the reality for most investors was significantly tougher. She pointed out that the median stock performance was negative, with a substantial majority of stocks declining. This divergence between index performance and individual stock returns underscores the importance of detailed fundamental analysis.
The Dangers of FOMO Investing
A core part of Mehra's advice centers on combating the 'Fear Of Missing Out' (FOMO). She cautioned against making investment decisions based on rearview mirror returns or the actions of others, particularly concerning assets like gold or international markets. Mehra asserted that FOMO is the wrong lens through which to view investments. Instead, she noted that academic evidence suggests periods of widespread pessimism often precede phases of above-normal market returns, presenting contrarian opportunities.
Rebuilding Your Portfolio for the Long Term
While advocating for investors to remain invested within their equity allocation, Mehra stressed the critical need for a portfolio cleanup. She urged investors to "harden their hearts" and exit holdings that lack fundamental justification, referring to them as the "debris of past bull markets and IPO excesses." This involves looking beyond the top holdings in a demat account to identify and eliminate underperformers.
Strategic Sector Allocations for 2026
Looking ahead, Mehra outlined her firm's current positioning. Portfolios are overweight in sectors such as autos and auto components, pharma, and healthcare. FMCG has recently become another overweight sector, driven by easing inflation and improving consumption trends. Banking sector exposure has been increased but remains cautious, balanced between public sector undertakings (PSUs) and private banks. Mehra also identified the Information Technology (IT) sector as a potential "dark horse" for a turnaround after a prolonged period of underperformance.
Caution in the Banking Sector
Despite increasing exposure, Mehra expressed a degree of nervousness regarding the banking sector. She cited structural risks associated with leverage and opaque credit quality, noting that management integrity, crucial for long-term success, often becomes clear only in hindsight. This perspective suggests a highly selective approach within banking.
Gold and Global Diversification
Regarding precious metals, Mehra recommended that gold and silver should constitute only a small part of an asset allocation strategy, typically in single digits, due to their inherent volatility. She also pointed out that strong returns from gold in Indian Rupees often reflect currency depreciation rather than intrinsic value gains. Investors can achieve global diversification through various instruments beyond solely relying on gold, though she cautioned that the US market alone does not constitute comprehensive global diversification.
Impact
This advice could significantly influence investor behavior, potentially leading to a reallocation of capital away from speculative small-cap bets towards fundamentally stronger sectors. It encourages a disciplined, risk-aware approach, which may lead to more stable long-term wealth creation for Indian investors. The focus on specific sectors could also drive targeted investment flows.
Rating: 8/10
Difficult Terms Explained
- Small Caps: Stocks of companies with relatively small market capitalization, often seen as higher risk but with potential for significant growth.
- FOMO (Fear Of Missing Out): An anxiety that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on social media, leading to impulsive investment decisions.
- Demat Statement: A statement detailing the holdings of shares and securities in an electronic format.
- IPO (Initial Public Offering): The process by which a private company first sells shares of stock to the public.
- FMCG (Fast-Moving Consumer Goods): Everyday items sold quickly and at relatively low cost, such as food, toiletries, and drinks.
- IT (Information Technology): The industry related to computers, software, networking, and other information technology infrastructure.
- PSU (Public Sector Undertaking): A company owned wholly or partly by the central government or a state government.
- Asset Allocation: The strategy of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, to reduce risk.