Midcap stocks on a free fall

Though frontline index such as NIFTY & SENSEX have been range bound, broader markets have taken a beating with many smaller companies falling by over 30% from their peak. Some of it is correction of excesses in the midcap space; it is also providing some good opportunities to enter some quality stocks at reasonable valuations. With the opposition coming together & BJP losing a few by-elections, it has contributed to some political uncertainty for 2019 general elections.

FIIs have been net sellers for the last couple of months. They were sellers to the tune of Rs. 6468 cr in April, followed by Rs.4977 cr in May 2018 largely due to global factors like FED rate hike, crude price rise & INR depreciation. The trend has reversed marginally in June with net inflows Rs.257 cr till 12th June as RBI raised rates. FII selling has been more pronounced over the last few months in the debt markets. With FED increasing rates & a couple of further hikes anticipated this year, there may not be respite in the short term.

Mutual fund industry’s asset base fell by nearly Rs. 66,000 cr to Rs.22.6 lakh cr at the end of May, primarily on account of outflow from income and liquid schemes. Liquid funds witnessed an outflow of Rs.46,724 cr. Further, income funds which invest in a combination of government securities saw a withdrawal of over Rs.20,000 cr. In contrast, continuing with the trend investors poured in more than Rs. 20,000 cr in equity schemes. Liquidity inflows into equity schemes through SIP still remain intact.

Midcap stocks have taken a hammering over the last few months. This is partly due to news of fraud, auditors’ resignations and rumors around their resignations in quite a few companies. Starting from Vakrangee Ltd in January, stocks such as PC Jeweller Ltd, Atlanta & Manpasand Beverages Ltd have all come under the scanner. These stocks have corrected by 60-90% from their highs. More than correction in individual stocks, this has made investors view midcaps with suspicion & have stayed away from midcaps, further contributing to a decline in the segment.

As evident from auto sales numbers I expect FY19 numbers to show good growth due to low base effect of last year. With GST implementation improving the overall business environment should also show some uptick. This should translate into better corporate earnings in FY19. NPAs in PSU banks remain a sticky issue, PSU banks which reported exceptionally high losses last quarter due to fresh write-offs are expecting to recover some NPAs in H1FY19. Some accounts like Bhushan Steel & Electrosteel Steels have been resolved. How the NPA recovery unfolds over the next year will be critical for the overall economy. With general elections coming up in 2019 markets may remain range bound waiting for some cues to what happens next year.

SIP inflows remain strong & till MF inflows sustain, markets should remain range bound. The 10 year g-sec is nearing 8% and the USD-INR is above Rs.67/$, both remain a concern. With crude prices inching up & concerns about increased government borrowing/fiscal deficit, both these will be critical. Inflation is inching up & further rate hikes cannot be ruled out completely. Though the broader indices have largely held on, there has been a sharp correction in midcap stocks which is providing a good opportunity to enter quality midcaps at reasonable valuations. One has to go with good quality companies at reasonable valuations and where there is a long term structural story in place.

Crude oil prices make markets slippery

The Tortoise Investment Strategy

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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