Small-Cap Misery Seen Ending in India Thanks to Rate Cuts
The smaller fry is about to join the 15 stocks that accounted for almost all the $51 billion climb in stock market this year.
(Bloomberg) -- Just 15 stocks have accounted for almost all the $51 billion climb in India’s stock market this year. Now the smaller fry might be about to join the party.
“We have given a call to our clients to start accumulating small and mid-caps,” said Nilesh Shah, chief executive officer at Kotak Asset Management Co., who helps oversee $25 billion in assets. “Somewhere here the bottom is being formed.”
With borrowing costs tumbling thanks to Reserve Bank of India’s interest-rate cuts -- and more such reductions anticipated -- the cheaper valuations of stocks that have been laggards during India’s rally may lure buyers. Also set to help, in Shah’s narrative: the Modi administration’s bigger-than-expected capital infusion in state-run banks, and a pick-up in monsoon rains that will aid agriculture. A rebound in small and mid-size enterprises may emerge by the festival season starting in two months, when consumer spending often picks up.
“We put all this together and we will suddenly see small and mid-caps rallying,” Shah said in an interview in his office on Wednesday.
Kotak has been gradually raising its exposure to the segment. The mid-cap oriented Kotak Emerging Equity Fund -- with an average annual return of 17% over five years, beating 98% of peers -- recently raised holdings of Supreme Industries Ltd., a maker of molded furniture, and Coromandel International Ltd., a fertilizer maker, data compiled by Bloomberg show.
Others, including CLSA India Pvt., also expect mid-sized businesses to benefit from efforts by Prime Minister Narendra Modi in his second term in office to lift growth from five-year low. The valuation of the Nifty MidCap 100 Index is near the cheapest since 2012 relative to the benchmark NSE Nifty 50 Index, suggesting a potential for rebound.
‘Polarization’
Smaller companies -- the stars of India’s market in 2017 -- underperformed during the sell-off that roiled India and other emerging nations last year. The Nifty mid-cap gauge closed 2018 with a decline of 15%, versus a 3.2% gain for the benchmark Nifty Index, as investors sought the safety of the biggest stocks amid headwinds from the trade conflict.
The divergence persists, with the mid-cap gauge down about 6% so far this year, even as the Nifty climbed to a record high last month.
“Polarization is very sharp,” said Shah. “The super large caps are trading at exorbitant valuations and have pulled up the market. But there are many stocks that haven’t done very well.”
Excerpts from the interview:
Outlook on sovereign bonds after recent rally
- “The future direction is that interest rates will go lower but there can be a pullback” after the drop in benchmark yields to the lowest in more than two years.
- “If you are invested stay invested. If you want to add duration, try to keep some money to invest at the pullback.”
On the slump in stock volatility
- “Low volatility is partly because the small- and mid-caps have fallen to levels where there’s hardly any selling. The large caps are expensive but no one wants to give up the safety. What is expensive you don’t want to sell and what is cheap you can’t buy.”
- NOTE: India’s NSE Volatility Index has slumped 21% this month to near the lowest on record
To contact the reporters on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net;Ravil Shirodkar in Mumbai at rshirodkar@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Christopher Anstey, Ravil Shirodkar
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