Slowdown in economy may prove a stumbling block for bull trend in mid-caps, say analysts
Even as investors bet on a resurgence for medium-sized Indian companies after Prime Minister Narendra Modi’s return to power, one of the country’s top mid-cap fund manager advises caution.
“This group of stocks won’t get an immediate lift from Modi’s victory as it is not immune to the slowdown in the economy and the lingering shadow bank crisis,” said Vinit Sambre, who oversees $1.6 billion in two midand small-cap funds at DSP Investment Managers in Mumbai.
“Corporate India is feeling the pressure of slowdown across the board, and we have not steered out of the non-bank finance crisis that began in September,” he said. “The overall market volatility will have some bearing on mid-cap stocks as well,” he added.
Brokerages including CLSA India expect mid-sized businesses to benefit on hopes Modi’s commanding majority will help him take steps to boost growth. A day after the poll results last month, Angel Broking said it expects the party to begin after a weak spell that has left the Nifty MidCap 100 Index trading at the highest discount to the large-cap gauge since 2012. Mutual funds dedicated to midand small-cap stocks in May took in half of the total equity flows.
Relying on loans
As the euphoria from the election victory fades, the focus is shifting back to reality. Many small- and mid-sized companies rely on loans to meet cash commitments and are prone to liquidity tightness in the financial system.
The mid-cap gauge on Friday halted two weeks of gains as data on May 31 showed the economy grew last quarter at a slower pace than economists expected. Investor confidence was also shaken by the crisis faced by shadow banks after the default of IL&FS Group in September. This past week, the bad news roared back, with troubled Dewan Housing Finance Corp’s rating cut to default.
“Growth has to return but it does not look like it is coming back soon,” said Sambre, whose fund has beaten 93 per cent of peers over a five-year period. High expectations are being built on the government taking measures to improve demand. Any delay in their ability to do so can have negative repercussions.
Sambre said he used the soft patch for midcap stocks to consolidate his fund by reducing the number of holdings to 50 from as high as 70. The fund exited non-bank finance stocks, while adding insurers and consumer-focussed firms that are likely to be less impacted from the slowdown, he said. The fund is also betting on private sector banks, drugmakers and producers of specialty chemicals and auto parts.