The markets have welcomed the budget 2021 with a surge. What would be the impact of Budget 2021 on the equity markets in the medium term?
This budget is clearly a pro-growth budget with higher focus on infrastructure and capital expenditure, stable taxation policy, emphasis on asset monetisation and clear policy on privatisation of PSUs (including PSU banks). This clearly shows governments resolve to push India’s growth trajectory higher. With good global liquidity and low rates and growth oriented fiscal policy, we can see prospects of good GDP growth and strong earnings growth after a long patch of weak earnings growth. This is very positive for equity markets.
Tell us about your medium to long term outlook on mid cap segment. What are the major triggers and the key risks for the mid cap segment? Why do you think it is right time for investors to invest in mid cap funds?
Indian economy is coming out of a cyclical slowdown of last three years which followed the introduction of many reforms such GST, insolvency code, RERA etc. The recent budget has given a further push to growth prospects. Mid cap segment is more levered to economic growth. Thus, the macro backdrop of improving growth is very positive for the mid cap segment. Further, midcaps have underperformed large caps over the last three years. History suggests that such underperformance is followed by period of strong outperformance. Thus we feel midcaps should do very well over the next three to five year period.
How comfortable are you with the valuations in mid cap space?
At an index level, the NSE Midcap valuations are slightly above average but nowhere near the peak. Further, we see good divergence within the index. There are many stocks within the cyclical sectors where the valuations are below their own long term averages. With the economic growth prospects improving, earnings growth outlook is much better than pre-covid years. Thus, despite the recent rally, valuations of quite a large number of midcaps are at very decent levels to enter into.
Which are the sectors that look promising in the mid cap space?
We are more positive on the cyclical sectors in general at this stage of economy which is coming out of cyclical slowdown. Thus sectors such as capital goods, industrials (which include many companies which are a play on improving prospects of Indian manufacturing sector), cement, infrastructure , consumer discretionary, financials. We are also positive on global cyclicals such as IT, pharma and metals.
We There are only 150 stocks in the mid cap stocks (as per AMFI). Don’t you think such a small basket can restrict your manoeuvrability?
The stock universe of 150 stocks has a good representation across different sectors and many stocks which have a strong market position in their respective fields. Its a very good universe to pick your portfoiio.
Mid cap funds have to invest 65% in mid cap stocks. How will deploy the rest 35% of the corpus to enhance the fund returns?
We will stick to the mid cap universe of 150 stocks for portfolio creation. It gives us a good diversity of sectors and we will stick to true to lable fund. We will have a maximum of 60 stocks in the portfolio.
What are the risk mitigation strategies that you will deploy in the fund?How will this fund be different from existing mid cap funds? Why do you think that MFDs should recommend this fund?
We will focus primarily on the midcap stocks as defined by AMFI. Weight of a single stock will be restricted to 3% at the time of investment so as to manage the liquidity and exposure risks. The portfolio will have a maximum of 60 stocks so that we are able to focus on the winners and achieve a proper balance between a high conviction portfolio and exposure/liquidity risks. In line with our positive view on the cyclical sectors, the portfolio will focus on stocks with strong earnings growth and potential re-rating. We will continue to focus on our SQL investment philosophy with a clear emphasis on quality of the business and margin of safety.
