To ride India's economic growth, it is important to have an investment in consumer discretionary, wellness, capital goods, infrastructure, cement, pipes, auto ancillaries, agrochemicals, etc. segments through mid and small-cap funds
A double-digit rally in broader markets could be in the offing in 2019 if historical precedences are taken into account.
Twice in the last 10 years, mid and small-cap indices have given a double-digit returns after falling in a heap, Kotak Mutual Fund said in a report.
In 2008, midcaps fell 59 percent only to rebound 99 percent next year. Similarly, smallcaps fell 71 percent and then jumped 107 percent next year. The phenomenon was repeated in 2011.
Broader market indices again fell in bulk in 2018. Small-cap index plunged 32 percent and mid-cap index fell 18 percent. Hence, analysts are betting that history could repeat itself. Broader market indices, however, have failed to get traction in 2019 till now.
Experts feel that mid and small-cap space can outperform but lingering concerns of liquidity, corporate governance issues and economic slowdown have capped the upside potential.
“The divergence between mid and large-cap indices has diminished slightly, which indicates a reversal in trend and provides a best-case to generate double-digit returns," Dinesh Rohira, CEO & Founder at 5nance.com said.
Many mid-cap stocks continue to trade below their historical average valuation. The lower valuation of such stocks also make them attractive, Rohira said.
Economic activity is an important factor for the growth of broader markets, suggest experts. “The journey of the Indian economy's size from $2 trillion to $5 trillion would expand the size of the formal economy multi-fold. It will allow many mid-sized businesses to grow and multiply profits over the next 5 to 7 years,” Kotak MF said in the report.
“To ride the economic growth, it is important to have an investment in consumer discretionary, wellness, capital goods, infrastructure, cement, pipes, auto ancillaries, agrochemicals, etc. segments through mid and small cap funds,” it said.
The report further added that within the mid-small caps space, there is a high return dispersion among stocks, which creates scope for active stock picking. Post correction in the mid-small cap indices, investors should start their allocation in a disciplined manner via SIP/STP route with a 3-5 year horizon.
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