Slow­down in econ­omy may prove a stum­bling block for bull trend in mid-caps, say an­a­lysts

The Hindu Business Line - - MARKET RADAR - BLOOMBERG

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.

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