My previous two notes on the topic –
Midcaps index has bounced from the recent lows and there are renewed talks of the index bottoming out. Consensus believes that the correction, which started in January 2018 maybe ending and going forward the midcap index would bounce back sharply and start outperforming the largecap index. Reasons for this belief include:
- Reversal of the FPI tax surcharge – levied in the budget, the government finally reversed it on August 23, 2019.
- Hopes for continued economic revivial measures – markets in general are optimistic that the government would continue to announce significant fiscal and monetary boosts to revive the economy.
- Attractive valuations – Forward PE (Price to earnings ratio) for midcap index at 12-13x seems attractive compared with the historical benchmarks
However, does that mean we are out of the woods…. Let’s check some key factors…
The biggest positive for now seems to be – Government’s stance has changed from denial to acceptance…
and when one accepts, the action is bound to happen !
What has changed is ‘increased awareness and wider acceptance’. However, due to the increased media coverage, it is currently working against us, by further denting the overall sentiments. SENTIMENTS, my regular readers would relate, is the single most important reason that I attribute the current slowdown to.
As mentioned before, the good thing is government is listening. There is a continued communication between Finance Ministry, Industry and press. Hopefully, we should see some key announcements soon. However, impact of any economic revival would entail time – unless government announces something that changes the consumer sentiment very quickly. What can that be? Something that significantly increases the disposable money available with consumers, e.g., revival of real estate, wherein significant money is stuck…
However, even if no significant announcements are made, I am not overly pessimisstic about the economy. This is based on my general interactions with few businesses across sectors – mood is of caution and not pessimism. Yes, auto numbers continue to be very bad but then it’s discretionary in nature and can move in tandem with the overall sentiments.
Good thing is that so far domestic money has countered the FII impact reasonably well and on month on month basis, MF inflows continue to be encouraging.
A significant reversal of fortunes for midcaps would need both FII and DII to turn positive, which can happen over short periods but personally I don’t expect over sustained periods, atleast for now…
I continue to struggle to factor this in my investment strategy. The fact remains that the decision is very recent, of significance and highly sensitive.
Irrespective of how we are doing domestically, we cannot move in isolation to the global markets – especially if the latter were to correct significantly.
However, as before, I would repeat the caution here. Yes, there are many companies that seem to be offering intrinsically good value. However, one needs to be extremely careful and choosy. We are still long way off from euphoric times !
It’s sometimes surprising, how charts follow a scripted path. Presently, I am talking about convergence between largecaps and midcaps, and midcaps facing significant resistance near trendlines !
Conclusion – Considering everything, I continue to tread with caution though with more optimism than before. Irrespective of how market behaves from hereon, it would provide sufficient opportunities to enter. Besides, I don’t follow the strategy of trying to pick the bottoms anymore !
Disclaimer: Above are my personal opinions and not any recommendation. The reader should do his own research before making any investment.
You are right Sir that there is no sign of revival style in economy but as You know markets starts climbing much before the Economy does. Also have seen CV stocks triple before they start giving positive monthly sales growth nos in the previous cycles, not sure about whether we are already in that upturn or we have to wait for it still.