Midcap Mania – Stock Picking is crucial for wealth creation
Indian equity markets have been in sweet spot from last three years by attracting higher investments from domestic and foreign investors. From fragile five economies during 2013 capital flight period, now India has emerged as world’s fastest growing economy. Falling inflation (Inflation-CPI stood at 4.31 in Sep, 2016 as against 10.92 during 2013), Improving twin deficits (CAD and Fiscal deficit), low/negative interest rates in the developed world and change in central government during 2014 have come together to shake the stock market from its sluggish mood.
The benchmark index, NSE NIFTY 50 has risen by more than 50% from 5471 in Sep, 2013 to current 8573. During the same period, since turn around has begun, midcaps and small cap stocks have been the hot favorite of the investors. The low valuations and huge wealth creation opportunities in this segment have attracted lot of funds from investors which have accelerated the stock prices in the past three years. Since Sep-2013, The Nifty Midcap index has more than doubled from 1750 to the current levels of 4054 by generating 31.3% Compounding annual return. The midcap segment has outperformed the main NFTY 50 index by wide margin of 15% in the same period. This outperformance has led to huge demand for mutual funds that focus on midcap segment. Compared to 2013, while large cap funds saw increase of 20% in Investments, the investments in mid cap have increased by 45% to touch Rs.74618cr in Aug 2016.
Midcap stocks are better placed to ride the domestic economic boom, But Stock Picking is crucial for wealth creation.
Retail investors are always late to enter the market and often play around already discovered high valuation stocks. The Nifty Midcap 50 is trading at all-time high valuations of P/E-38x, P/B -2.6x compared to main index valuations of P/E-23x and P/B-3.25x. The stock prices at these high valuations in the mid cap space look unattractive against their expected earnings growth. And when stocks suffer due to their inability to perform to match their valuations, Investors get poor returns.
The stock selection has become very crucial currently with not many good stocks available in the market to buy. Many of the quality midcaps are already trading at sky high valuations. We advise investors either to wait for correction or to invest in select stocks which are trading at low valuations and have potential to generate good returns with little down side. The one sector which has not participated in the recent rally is real estate sector. After the 2-3 years of poor performance, this sector is witnessing turnaround with increasing sales velocity and picking up in project execution. We are expecting the sharp increase in financial numbers of few real estate stocks in the next 2 to 3 quarters with their projects crossing revenue recognition threshold. One can look at these stocks to invest in the current market to generate good alpha for their portfolio.