 "Start thinking large-cap now")
At the start of the bull run in September 2013, if an investor would have put Rs 1 lakh in the BSE mid-cap index, he would have almost doubled his investment. During this period, the index went from 5,709.46 to 11,158.40, a gain of 96 per cent.
The same investment in the National Stock Exchange's benchmark Nifty, that went from 5,471.80 to 8,421.80, would have only fetched the investor Rs 1.54 lakh. The top performer in mid-cap space, Aurobindo Pharma, returned 697 per cent in the period, whereas Bharat Heavy Electricals, top stock in the Nifty, returned only 247 per cent.
The top five mid-cap companies by market cap are now two to three times bigger than some of the large-cap businesses.
The performance of mid-cap companies has been stellar in the past three years. For market experts, it has also been a reason to worry. "Mid-caps have run ahead of themselves at the index level. One can argue that there would still some undervalued stocks. But the category has been outperforming the large-caps overall, and investors do need to diversify their investments," says Anil Sarin, head of equity investments at Edelweiss Financial Services. He feels the performance is not sustainable and "caution is warranted" for further investments in the category.
Advisors suggest investors selectively book profit in their mid-cap stocks and look at large-caps, many of which are presently undervalued.
Large-cap picks
Sanjiv Bhasin, executive vice-president, IIFL, says most of the growth in Nifty stocks has primarily been because of fast moving consumer goods (FMCG), information technology (IT), pharmaceuticals and private banks. Other than these, most other companies are available at attractive valuations, some of which are trading at 2008 levels.
G Chokkalingam, founder of Equinomics Research & Advisory, feels oil marketing companies are still lucrative, despite their recent run-up. "At least for two years, oil prices will continue to be at reasonable levels."
If the economy and credit cycle show signs of a turnaround, investors will also benefit from investing in Nifty companies that are in infrastructure and capital goods, says Bhasin. However, they need to be patient in these sectors.
Investment strategy
Sarin of Edelweiss says it's a tough call for investors. Metal companies in the Nifty are available at a cheap valuation but if the 'irrational' commodity price slide continues, these stocks can take a further beating. The current valuations of large-caps are also based on certain earnings' presumptions. If these are not met, there could be a correction in these stocks, too. He, therefore, suggests investors look at the quarterly results of large-cap stocks and see if these have already bottomed out, and if they're showing signs of growth in the business.
For those without the time to analyse companies, Bhasin suggests such investors can look at the Nifty and banking exchange-traded funds. His reason is, when the non-performers in the index turn around, the current favourites of FMCG, IT and pharma will continue to be at the same valuations, pushing up the index. Similarly, when there's an uptick in credit growth, it would make sense for an investor to have a bouquet of banks rather than betting on individual stocks.
Singh of ICICI Prudential AMC, who believes that whenever mid-caps are available at a premium to large-caps, either the latter grows and catches up or the former corrects, suggests investors now look at multi-cap funds with a large-cap tilt of around 70 per cent.
Profit booking in mid-caps
No experts suggested investors completely offload their mid-cap stocks purely on the basis of high valuations. Chokkalingam says there's a dichotomy in these scrips. While some have high valuations and high growth, many have unusually high valuations, giving rise to a 'bubble' that can burst any time. He suggests investors keep stocks that continue to show strong earnings growth, quarter on quarter. Experts say the mid-cap universe is too vast, of around 3,500 firms. The best parameter is to stick to stocks with a market valuation over Rs 10,000 crore.
The same investment in the National Stock Exchange's benchmark Nifty, that went from 5,471.80 to 8,421.80, would have only fetched the investor Rs 1.54 lakh. The top performer in mid-cap space, Aurobindo Pharma, returned 697 per cent in the period, whereas Bharat Heavy Electricals, top stock in the Nifty, returned only 247 per cent.
The top five mid-cap companies by market cap are now two to three times bigger than some of the large-cap businesses.
The performance of mid-cap companies has been stellar in the past three years. For market experts, it has also been a reason to worry. "Mid-caps have run ahead of themselves at the index level. One can argue that there would still some undervalued stocks. But the category has been outperforming the large-caps overall, and investors do need to diversify their investments," says Anil Sarin, head of equity investments at Edelweiss Financial Services. He feels the performance is not sustainable and "caution is warranted" for further investments in the category.
Advisors suggest investors selectively book profit in their mid-cap stocks and look at large-caps, many of which are presently undervalued.
Large-cap picks
Sanjiv Bhasin, executive vice-president, IIFL, says most of the growth in Nifty stocks has primarily been because of fast moving consumer goods (FMCG), information technology (IT), pharmaceuticals and private banks. Other than these, most other companies are available at attractive valuations, some of which are trading at 2008 levels.
G Chokkalingam, founder of Equinomics Research & Advisory, feels oil marketing companies are still lucrative, despite their recent run-up. "At least for two years, oil prices will continue to be at reasonable levels."
If the economy and credit cycle show signs of a turnaround, investors will also benefit from investing in Nifty companies that are in infrastructure and capital goods, says Bhasin. However, they need to be patient in these sectors.
Investment strategy
Sarin of Edelweiss says it's a tough call for investors. Metal companies in the Nifty are available at a cheap valuation but if the 'irrational' commodity price slide continues, these stocks can take a further beating. The current valuations of large-caps are also based on certain earnings' presumptions. If these are not met, there could be a correction in these stocks, too. He, therefore, suggests investors look at the quarterly results of large-cap stocks and see if these have already bottomed out, and if they're showing signs of growth in the business.
For those without the time to analyse companies, Bhasin suggests such investors can look at the Nifty and banking exchange-traded funds. His reason is, when the non-performers in the index turn around, the current favourites of FMCG, IT and pharma will continue to be at the same valuations, pushing up the index. Similarly, when there's an uptick in credit growth, it would make sense for an investor to have a bouquet of banks rather than betting on individual stocks.
Singh of ICICI Prudential AMC, who believes that whenever mid-caps are available at a premium to large-caps, either the latter grows and catches up or the former corrects, suggests investors now look at multi-cap funds with a large-cap tilt of around 70 per cent.
Profit booking in mid-caps
No experts suggested investors completely offload their mid-cap stocks purely on the basis of high valuations. Chokkalingam says there's a dichotomy in these scrips. While some have high valuations and high growth, many have unusually high valuations, giving rise to a 'bubble' that can burst any time. He suggests investors keep stocks that continue to show strong earnings growth, quarter on quarter. Experts say the mid-cap universe is too vast, of around 3,500 firms. The best parameter is to stick to stocks with a market valuation over Rs 10,000 crore.
| Themes for next three years |
| Markets, by nature, are volatile. No matter how long an investor waits, he has to end up investing in an uncertain environment. We can reduce that uncertainty by investing in sectors which have clear visibility and increasing the time to remain invested. There are two key themes, I would look at. The 7th Pay Commission, set up by the UPA government last year on February 28, will give its recommendations by August 31. It is expected, the carry home salary of the average central government employee will go up by 28-30 per cent. Around five million central government employees will benefit from this largesse. Around 10 million state government employees will benefit after a lag of one year. This will mean an additional Rs 3,20,000 cr in the hands of government employees per year. A large part of this amount is likely to flow in discretionary spending. This will mean manna for the automobile, electronics, home appliances and financial services companies. Also, the government is likely to appoint private sector bank executives to fill vacant positions in public sector banks. Provisioning could increase in such banks initially, but will benefit from the no-nonsense management style and will command higher valuations. Bank of Baroda is my pick. More importantly, the public sector banks have borne the brunt of the economic slowdown, in terms of higher provisioning. As the economy picks up, there will be writebacks as the bad assets become well. VK Sharma, Head - Private Client Group at HDFC securities |