MUMBAI: The midcap space is likely to get buying support from additional buying of $0.7 billion-$1.2 billion going forward as mutual funds align schemes with new regulatory norms, said Hong Kongheadquartered firm CLSA in a note.
In October, the Securities and Exchange Board of India (Sebi) had issued a circular directing mutual funds to group their schemes under largecaps, midcaps and small-caps as per the market capitalisation of the stocks that the scheme has invested in. The most impactful restriction is the one that stipulates midcap schemes to own 65 per cent of the assets under management in midcaps as designated by the Sebi, said CLSA. The capital markets regulator designates the top 100 companies by total market capitalisation as large-caps and the top 101-250 companies by market capitalisation as midcaps. Companies that have market cap lower than the top 250 companies are designated as smallcaps.
CLSA said that midcap mutual fund portfolio realignment to the 65 per cent level is progressing at a slow pace. The firm’s analysis on holdings of 21 midcap mutual funds with an AUM of Rs 72,100 crore as of January 31 and the list of stocks as defined by the Sebi, suggested that only three of the funds have more than a 65 per cent holding in midcaps compared to none in October last year.
“The mutual portfolio adjustment is not over yet... Considering potential scheme reclassifications, we estimate a US$0.7bn (billion)-US$1.2 bn (billion) in net buying of midcaps would be required over the next 3-4 months assuming US $400 m (million) –US $500 m (million) of rebalancing already took place during Feb (February) 2018,” said CLSA’s Mahesh Nandurkar, Abhinav Sinha and Alok Srivastava in a report.
The new norms have already helped the stocks that are designated as midcaps to some extent as these stocks outperformed the Nifty index not only in the October 31-January 31 period but also in February when the market fell sharply, said CLSA.
The Nifty and the Sensex fell 4.8 per cent in February as surging bond yields in the US, high oil prices, introduction of long-term capital gains tax on equity in India and fear of MSCI reducing India weightage in its indices, impacted sentiment.
