Investors looking for opportunities to make money in India’s election year will most likely find them in the battered corner of the nation’s $2 trillion stock market: mid-cap shares.
Mid- and small-sized companies are trading at a discount to their historical averages after the recent selloff, and the fund house plans to gradually boost its exposure to them relative to their larger peers, Nilesh Shah, chief executive officer of Kotak Asset Management Co., said in an interview.
“It is like going down the beaten-down path and trying to find jewels,” said Shah, who helps oversee $24 billion in assets. “While some stocks corrected for the right reasons, you have to pick those where there’s a mismatch. Assuming valuations support us, we may get overweight small- and mid-caps toward elections” that are due by May, he said.
His strategy may prove to be timely. The Nifty MidCap 100 Index had its best day in more than two months Tuesday, extending two straight weeks of gains amid easing cross-border tensions and resumption of purchases by foreigners. The gauge’s valuation is still near the cheapest in five years relative to the benchmark NSE Nifty 50 Index, signalling the potential for further gains.
Smaller companies, stars of India’s market in 2017, were at the receiving end of the selloff that roiled India and other emerging nations last year. The Nifty midcap gauge closed 2018 with a loss of 15 percent, versus a 3.2 percent gain for the Nifty Index, as investors sought the safety of the biggest stocks amid headwinds from the trade conflict and rising oil prices.
The divergence persisted until recently, with the midcap gauge dropping to its lowest level since October in mid-February even as the Nifty reclaimed the 11,000 level. On Wednesday, mid-cap stocks rallied for a fifth day, helping the NSE MidCap 100 Index close at its highest level since Jan. 18.
“We want to avoid paying too much of a valuation premium for the comfort of a name, or a brand, because overpaying invariably catches up with you,” Shah said, referring to large-cap stocks that have been this year’s popular trade.