Mid & smallcap funds poised to deliver, but set your horizon first

NEW DELHI: A clear political mandate for NDA has infused positive sentiment in the domestic equity market, as investors sitting on the sidelines in the runup to the election are now entering the market to put fresh bets in anticipation of policy measures that can revive growth.While the market looks ripe for investors to take a plunge, analysts say this is the time when one should follow a prudent approach to maximise gains, as valuations are steep now.Nifty trades at a price to earnings (PE) ratio of 29.44, against 20.39 in May 2014, when Modi came to power at the Centre for the first time.Fund managers are almost unanimous in their views that this is the perfect time to start looking at midcap and smallcap funds, as the new government is likely to come up with a set of strong policy measures to reignite growth. The key is: one should have a defined allocation to midcaps and smallcaps. "To optimise returns, investors should have a defined allocation to midcaps and smallcaps, as it sometimes gets extremely difficult for investors even with a very strong stomach to withstand a carnage," Dhirendra Kumar, CEO, Value Research, told ETNOW in an interview. Midcap and smallcap funds have not done well in last two to three years amid bearish sentiment in the market due to the US-China trade tension, the slowdown in the economy and uncertainty ahead of general election, which forced investors to take shelter in safer bets. “In last two years, everybody was relatively bearish. Even the money that was going into equities because of asset allocation was going to safer options, the largecaps. Even among the largecaps, money flow had happened only to a few stocks,” said Jharna Agarwal, Head of Products at Anand Rathi. So, what has changed now? Certainly, a clear mandate for the NDA has raised hopes that the government will focus on economic revival. “It is not that things will change in six months. With a strong government at the Centre, a lot of economic activities are going to start happening,” Agarwal said.There was a sort of stagnation in infrastructure projects in last 1-2 years due to the liquidity crisis and policy bottlenecks, which is likely to change. Infrastructure projects should kickstart and measures that can ensure liquidity in the system would augur well for midcap and smallcap firms.Agarwal expects order flow to start coming to midcap companies, which are essentially suppliers to largecap firms. Clearly, the sector is looking bright. But Agarwal emphasised that she would not recommend anyone to go for midcap and smallcap funds if they have an investment horizon of less of four years. “In two years, we expect these funds in general to outperform largecaps by on an average 2-3 per cent," she said.Pankaj Tibrewal, Equity Portfolio Manager and Senior VP, Kotak Mutual Fund, said clarity on the political front is manna from heaven for midcap and smallcap funds."After the strong underperformance of midcaps and smallcaps compared with Nifty50, a clear political mandate is a source of comfort on a stable government and policy predictability. This segment should do well going forward," Tibrewal said.He cites a historical trend, saying whenever midcaps and smallcaps underperformed by more than 15 per cent, the next 12-18 months have always been generally strong for these stocks.Tibrewal expects the discount in midcap and smallcap indices compared with the largecaps to narrow down in 1-2 years. "The discount as of now is at a historical extreme. We believe this discount of midcaps and smallcaps against largecaps should narrow in next 12-18 months," he said. However, a lot depends on the revival of the economy which can give momentum to many companies and sectors. "The environment is still very fragile; the NBFC crisis is still not over completely. We have a slowdown in consumption. So the rally will not be as broad as we saw in calendar 2017. Yet, bottom-up stock picking will be rewarded," he said.In last two-three years, reforms like GST, demonetisation and IBC in a way weeded out weaker companies. In every sector, leaders are emerging stronger and stronger. If growth revives, we will see strong momentum in many companies across sectors,” Tibrewal added.

from Economic Times http://bit.ly/2JJQgt3