Midcaps reinforce pre-election rally: Angel Broking

Mr. Jyoti Roy (DVP - Research, Angel Broking Ltd)

"Markets had a rough start to 2019 and were extremely volatile till about the last week of Feb due to barrage of negative events like resurfacing of IL&FS Crisis, Sharp fall in stock prices of certain large corporate houses saddled with high debt, and escalating Geo Political tensions between India and Pakistan. However markets were clearly ignoring positive factors like a dovish US Fed, 25bps rate cut by the RBI and a good Union Budget which tried to address the issue of farm distress.

Geo political tensions had taken center stage during February but deft handling of the issue by the Indian Government and subsequent de-escalation of tensions helped market sentiments. Post the farm package in the Interim Budget and de-escalation India Pakistan tension, sentiments seems to have turned in favor of the incumbent Government prior to the crucial general elections in April-May 2019.

Macro concerns too have receded sharply over the past few months as inflation, crude prices and bond yields have come off. Inflation has been undershooting the RBI's projection by a wide margin and is expected to remain low well into second half of 2019. Q3 GDP growth came in below street estimates at a five quarter low of 6.6% which opens up further room for rate cuts. We believe that there is room for additional 50-75bps rate cuts in 2019.

Global concerns have also receded with the US fed indicating that they will be patient in raising rates going forward and are also willing to relook at the balance sheet adjustment if required. Markets are also anticipating a positive outcome of the US China trade negotiations very soon. Brexit is an immediate though a rather smaller concern which may cause some small hiccups over the next week or so.

Valuations in the mid & small cap space had been beaten down significantly over the past one year and at the peak of the India Pakistan tensions they were trading at ~10% discount to large caps which was last seen in 2013 when India was grappling with twin balance sheet problems, runaway inflation and was reeling under a currency crisis. However macro conditions are much more stable now and structural changes are like GST, Demonitisation and RERA have set a base for very strong growth over next 3-5 years.

We believe that prospects of a weak Government at the center have receded significantly over the past few weeks which are being factored in by the markets. Mid & Small cap stocks are now available at very reasonable valuations and we expect them to lead the pre-election rally. In the MF space our preference would be for multi cap & mid cap funds over large cap funds."

Source : Equity Bulls

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