Midcaps likely to outperform largecaps in 2019; Sensex target for year-end at 45K: Karvy
Midcaps tend to outperform when risk appetite is high and the valuations are at a significant discount to largecaps, Vivek Ranjan Misra, Head of Fundamental Research at Karvy Stock Broking, said in an interview with Moneycontrol’s Kshitij Anand.
Q) March started on a positive note with Sensex and Nifty reclaiming crucial resistance levels (Sensex above 37,000 while Nifty climbed 11,300). Do you think the momentum will continue till elections?
A) We believe that market momentum can be sustained. There are a few facts to be considered. Earlier in 2018, India outperformed emerging markets (EMs), but in 2019, India has been underperforming its peers.
This was largely due to the uncertainty around the electoral outlook which had become more uncertain. However, recently, market participants have started discounting a higher probability of the incumbent government getting re-elected.
And, as we proceed ahead in the election season, these expectations may change, leading to volatility. However, we believe that equities are likely to do well in 2019.
Q) Valuations of small & midcaps have now become compelling after the recent correction. Do you think it is time to spot some beaten down stocks in the broader market?
A) A case can be made for investing in the midcaps. Midcaps as a group tend to outperform when risk appetite is high and the valuations are at a significant discount to largecaps.
While we believe that risk appetite has picked up significantly, and the valuations of midcaps are in a neutral zone compared to largecaps.
Our expectation is that midcaps will outperform largecaps, though the extent of outperformance may not be as high as in previous cycles.
One noteworthy point is that mid-caps have a higher weight of cyclical stocks which are leveraged to the domestic growth story, and as the economy picks up in the second half of the year, mid-caps are likely to outperform.
Q) Morgan Stanley in its equity strategy said that we have entered the second decade of a bull market. Do you agree and do you see Sensex breaking 50K in the second decade?
A) We believe that the probability of Sensex peaking at 50,000 or more in the current bull market is high. One note of caution is that the Indian market is correlated to global markets, and the global business cycle is maturing.
The probability of a global recession in 2020 cannot be dismissed and thus some caution would be warranted by mid-2020.
Q) Where do you see Sensex/Nifty by the end of the year?
A) Our target for Sensex for December 2019 is 45,000, and for Nifty it is at 14,000.
Q) Market is taking comfort in the fact that the possibility of BJP coming back to power in 2019 has become more realistic. Do you think this one big factor which is supporting the sentiment on the Street?
A) Yes, that is one of the factors. There are other factors which are behind the rally, firstly global markets have been in a risk on mode, and emerging markets have led the rally.
Indian markets have benefitted from emerging markets coming back in focus, as well as increased probability of the incumbent government getting re-elected.
Q) Two beaten-down sectors in the recent past are finding their footing back on D-Street i.e. PSU banks and metals. What are your views?
A) We believe that PSU banks may be the dark horse for 2019. If the economy improves, and if growth is led by capex spending, then banks, in general, are in a sweet spot.
Though better capitalized private banks are better placed, PSU banks will benefit as well. Also as the market is placing a higher probability of the current government getting re-elected, this benefits all state-owned firms. We are a bit more skeptical about the metals sector. The outlook for the sector is largely driven by expectations about the Chinese economy.
Recent monetary and fiscal stimulus, as well as expectations of a truce in trade wars has led metal stocks higher, however, it is important to remember that Chinese policymakers also want to change the drivers of growth, and we expect metals to lag the market.
Q) What are your expectations from the rupee? It hit a fresh 2-month high in the week gone by? IT and pharma back in focus?
A) There are a couple of factors, firstly political risk associated with the INR on account of elections now appears to be lower, secondly, on account of lower inflation, depreciation pressures on INR are now lower.
This means that the INR could rally in the short term unless there is a rally in oil prices. However, the INR could depreciate marginally against the dollar in the medium term.
The rupee is one of the factors that drive the IT and Pharma sector, we believe that other factors will outweigh the currency factor with a one to two-year view. Broadly we have a positive view on the IT sector.
Q) Fears of global growth has again resurfaced especially after ECB decision as well as OECD report. Should investors be worried?
A) A slowdown in the global economy is a risk; in the recent past, flattening of the US yield curve has given rise to fears of a recession, after all the longest business cycle expansion in the US lasted for 120 months starting from March 1991 to March 2001.
The current cycle, the second longest expansion in history began in June 2009 and questions about how long the business cycle expansion will last are natural.
We are more concerned about developments in China. Chinese officials have lowered growth estimate for 2019 in the range of 6-6.5%, which would be the lowest rate in 30 years.
In 2018, fixed asset investment (FAI) grew by 5.9 percent, the lowest since 1999.
To boost slowing growth, China has announced a fiscal stimulus program and the PBoC has loosened monetary policy as well. But it is not just China, the economy of the Eurozone is also weak, the ECB on 7th March launched the third TLTRO (Targeted long term refinancing option) program, cutting their estimate for growth from 1.7% to 1.1%. In Q4 2018, Germany, the largest economy in Europe narrowly avoided a recession.
Overall, the data is supportive of a view that the global economy will be slowing down in 2019, though a recession is unlikely.
Policy action in China and Eurozone should help. The Indian economy may remain resilient, and growth should improve in the second half of 2019, and we remain optimistic.
Q) The big rally that we are seeing in mid & small-caps stocks. Is it FoMo playing out (fear of missing out)? Should retail investors fall into this trap?
A) We are broadly constructive on the prospects for equities in general and mid and small caps. Our advice to retail investors would allocate money to equity markets.
However, even in a bull market there are stocks to avoid; investors they should do research on individual stock names before investing.
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