Funds Pitch Patience to Investor Bets on Indian Midcaps
An hourglass. (Source: BloombergQuint)

Funds Pitch Patience to Investor Bets on Indian Midcaps

(Bloomberg) -- Investors in India’s mid-sized companies’ shares will need to be patient for returns to improve as the nation’s recovery from an economic slump will be slow, according to fund managers.

The NSE Nifty Midcap 100 Index logged its biggest monthly gain in 10 months in January, as the gauge rebounded after back-to-back annual declines fueled by a shift in investor preference toward safer stocks amid a slowing economy. While the worst is now behind for mid caps, the segment will gain meaningful ground only when economic data adds to early signs of a growth turnaround.

Funds Pitch Patience to Investor Bets on Indian Midcaps

“We expect that, toward the end of this year, we may start seeing some green shoots and rural will be a big driver,” Vinit Sambre, head of equities at DSP Investment Managers Pvt., which oversees $7.5 billion in stocks, said in an interview in Mumbai.

S&P Global Ratings earlier this month left India’s rating unchanged, saying the economy’s growth potential remains intact despite the slowdown. The central bank expects growth to rebound to 6% in the year starting April, from an estimated 11-year low of 5% this year. Risks remain, however, with the coronavirus outbreak clouding the global outlook.

“The recovery will be gradual and stocks may not move up significantly as current valuations are factoring in some amount of pick up,” said Sambre, whose midcap fund has beaten 94% of its peers over a five-year period.

A broad-based slowdown in consumer spending and a lingering credit crunch saw investors pile into a few of the South Asian nation’s biggest companies, which sent the main equity index to a record last year even as mid-cap stocks suffered their second straight annual drop.

Funds Pitch Patience to Investor Bets on Indian Midcaps

The divergence has spurred fund managers, including UTI Asset Management Co., to raise their exposure to mid-sized companies. Retail investors have also begun loading up on them -- funds dedicated to mid caps in January lured a net 18 billion rupees, the most since the Association of Mutual Funds in India began providing granular data in April.

“We’ve been rotating money away from large caps because after a long time we saw valuations in our favor,” Vetri Subramaniam, head of equities at UTI, said by email. “In one of the strategies I run, we’ve gone from 18%-19% in mid and small caps one-and-a-half year ago to almost 30%,” he said.

The Nifty Midcap Index, which has fallen 2.4% so far this week, trades at an estimated price-earnings ratio of 22, up from a five-year low of about 14 in May. The valuation of the midcap gauge relative to the NSE Nifty 50 Index is now at the 10-year average. The ratio had narrowed to smallest in seven years in May.

Still, valuations shouldn’t be treated as a “timing device,” Subramaniam said.

“Just because something is priced at a discount doesn’t mean it will immediately start performing,” he said. “What it tells you is that an opportunity is opening up, risk-reward has become positive and if you can hold the bet for an extended period, you will be able to get the benefit.”

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