Mid-Caps Outperform Sensex For Third Straight Year
People outside the Bombay Stock Exchange (Photographer: Dhiraj Singh/Bloomberg)

Mid-Caps Outperform Sensex For Third Straight Year

India’s mid-cap stocks outperformed the benchmark S&P BSE Sensex Index for the third straight year as better-than-expected earnings and higher domestic inflows offset fears over Brexit, Donald Trump’s win and demonetisation.

It’s the longest stretch for which the S&P BSE MidCap Index has outperformed the benchmark since data became first available in 2005. The index rose 33 percent in the year ended March 2017, giving twice the returns compared to the Sensex.

Mid-Caps Outperform Sensex For Third Straight Year

On an average, the revenue of the 30 Sensex constituents grew at less than half the pace compared to 13.4 percent growth for mid-cap index stocks.

Driven by better-than-expected earnings, domestic investors poured funds into mid-caps as foreign investors chased large caps, said Gaurang Shah, head investment strategist at an Indian brokerage house, Geojit Financial Services Ltd.

As the ownership of large-cap stocks has been concentrated with foreign investors, the domestic investors could find opportunity and value in the mid-cap stocks. 
Gaurang Shah, Head Investment Strategist, Geojit Financial Services

Domestic institutional investors invested more than Rs 56,500 crore into the equity markets in the last financial year, while the foreign institutional investors put in close to Rs 55,700 crore.

Foreign investors own 27.3 percent of Sensex stocks compared to 19.43 percent of the mid-cap index. Over the last three years, the foreign ownership in the Sensex stocks has increased by a little over three percentage points compared to half a percentage point rise in their holding in mid-cap index.

Mid-Caps Outperform Sensex For Third Straight Year

Though mid-caps have shown a good fundamental run-up, G Chokkalingam, founder and managing director, Equinomics Research & Advisory, said “it is time to be cautious” as majority of such stocks do not have the valuation comfort.

The mid-cap index not only trades at a 37 percent premium to the Sensex, but also at a 19 percent premium to its five-year average price-to-earnings ratio.

Mid-Caps Outperform Sensex For Third Straight Year

Along with premium valuations, the public offers lined up in the market will also put pressure on financial resources of investors, said Chokkalingam.

As we see a boom in IPOs (initial public offerings) and QIP (qualified institutional placement) issues, companies going for more rights issues and the government hitting the capital markets to meet its divestment target, we can see a lot of pressure on the financial resources. 
G Chokkalingam, Founder and Managing Director, Equinomics Research & Advisory

With demand for initial public offerings at the highest in 11 years, there is a high chance of profit-booking in mid caps as investors may look to free up their resources.

Mid-cap stocks could end their dream run. Atul Bhole, vice-president and fund manager, DSP BlackRock Mutual Fund, advises investors to take the mutual funds route as mid-cap investing can be more volatile.

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