Now that the two large-cap indices-Sensex and Nifty 50- have soared to new highs ahead of Diwali 2020, some experts believe that mid-caps and small-caps are poised to outperform. However, that hasn't been the case this week.
With economic recovery outlook still looking hazy, investors have been betting on large-cap companies where earnings certainty is clearer.
Mahurat Trading this year is scheduled for 14 November 2020. Stocks are usually bought on this day with a long-term perspective in mind. Should you look at mid-caps this Diwali?
Large-caps have been clear winners
A primary driver of the rally seen in large caps this week has been a surge in foreign capital inflow. With Federal Reserve indicating that its policy rates will remain low for three years, and an upcoming US stimulus, the excess liquidity among foreign investors is moving to markets that are more likely to recover faster than the US.
In India, the biggest beneficiaries have been the IT and pharma sector, the two major export-oriented businesses of the country, which have been benefitted from the coronavirus pandemic and consequentially work-from-home culture. Companies in this sector are expected to have good business order book based on this factor.
In comparison, other commodity-oriented emerging economies, like Brazil or Russia, are looking less likely to make a V-shaped recovery; making India more attractive to foreign institutional investors.
Institutional investors, including domestic mutual funds, tend to allocate more to large caps for their low-risk and stable reward appeal. Further, better-than-expected September-ended quarterly results reported by most of these companies have also helped build investor confidence.
It's more likely that market participants are playing safe and betting where there is more certainty of earnings; that is, in well-performing sectors and in companies with the potential to increase market share.
MSCI Index rejig
With effect from 1 April 2020, the Indian government permitted an increase in the foreign portfolio investment (FPI) limits. As an effect, MSCI, in its latest semi-annual review, announced the addition of multiple Indian stocks to its indices, thereby increasing their weightage.
Among large caps in its Global Standard Index, 2 stocks were removed and 12 added. In the MSCI India Small Cap Index, 8 deletions were made and 30 stocks added.
The additions in small caps included, 3M India, Aarti Drugs, Adani Gas, Aditya Birla Capital, Alkyl Amines Chemicals, Advanced Enzyme Tech, Affle (India), Alkyl Amines Chemicals, Aster DM Healthcare, Birlasoft, Bombay Burmah Trading, Castrol India, Central Depository, Cyient, Fine Organic Industries, Firstsource Solutions, Garware Technical Fibres, Infibeam Avenues, IOL Chemicals and Pharmaceuticals Limited, L&T Finance Holdings, LIC Housing Finance, MAS Financial Services, Mindspace Business REIT, Narayana Hrudayalaya, Ratnamani Metals & Tubes, Sonata Software, Tanla Solutions, Thyrocare Technologies, Vaibhav Global, Zensar Technologies and Zydus Wellness.
Should you invest in mid-caps?
While mid-caps can prove to be good bets for long-term wealth creation, sustainable growth in the space needs clarity on the shape, strength and the speed of their recovery. The key is to pick quality companies with sustainable businesses.
If you want to stick to the popular theme of pharma and IT in the mid-cap space, there are companies like Larsen & Toubro Infotech Limited and Aarti Drugs, that brokerages are betting on.
If you are a risk-averse investor, you can bet on mutual funds with exposure to the category. Even multi-cap funds could be considered from January 2021 onwards as allocation rules are set to change to provide higher exposure to mid and small caps.
Ultimately, don't go by temporary trends in the market. Investing in mid-cap and small-cap stocks means high-risk, especially in times of economic stress. Mutual fund investments via SIPs could be a great way to diversify investments and reduce risk.
While mid-caps and small-caps hold great potential, their success hinges on macro-economic recovery. If demand does not recover at a faster pace and if these businesses are not able to manage their debt levels, their existence could be threatened. Additional government stimulus to support smaller companies can also be a plus.
You can look to allocate not more than 10 percent of your investment in mid-caps.
HDFC Securities Mid Cap Stock Picks for Diwali 2020:
The brokerage said that after a volatile previous year, it is looking forward to a "relatively sedate but selectively rewarding" new Samvat.
Among mid-caps, HDFC Securities picked 5 stocks:
1. Alembic Pharma
- Buy at: Rs 877-885
- Target price: Rs 1,148
- Potential upside: 17%
2. Credit Access Grameen
- Buy at: Rs 520-540
- Target price: Rs 797
- Potential upside: 18%
3. Gujarat Gas
- Buy at: Rs 270-273
- Target price: Rs 356
- Potential upside: 14%
- Buy at: Rs 1,234-1,238
- Target price: Rs 1,511
- Potential upside: 13%
5. Radico Khaitan
- Buy at: Rs 380-390
- Target price: Rs 545
- Potential upside: 26%
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.
About the author
Olga Robert is an M.Com graduate covering equity markets and personal finance for nearly three years. Her interests include tax planning, equities, DIY personal finance management and government schemes.