The momentum might shift to mid and small caps

Market is slowly and steadily moving ahead despite weak domestic economics on account of better liquidity and expectation of revival in fortunes. The overall domestic risk has reduced due to business-friendly policies of the Government in the last two quarters with supportive stimulus and tax benefits. The risk appetite of investors is gradually improving on expectation of further steps to be undertaken by the government in upcoming budget to revive consumption. On global front, we are finally seeing a possibility of US-China trade deal and Brexit, leading to reduction in global risks.

In CY2019 benchmark indices touched all-time highs, but it was also characterized as a polarized market. In fact, this polarization of the index is not a new phenomenon, but it was clearly visible in the last three years. Large caps have performed better than Mid / Small caps, as money was chasing few high-quality stocks, which are now richly valued and may not match previous historical returns in the future. But this time even the performance of large caps has shown divergence, which was largely due to the demand slowdown witnessed in the economy, lag in credit growth, structural change in industries, stuck projects, earnings divergence and cyclical slowdown.

Considering that the key benchmarks are at all-time-high, it is a normal tendency of well-versed investors to start behaving careful and to reduce their exposure in equity market. But please note that Nifty Mid cap and Nifty Small cap are below 22% and 40% from the all-time highs. We feel that mid and Small caps are going to perform well in CY2020. This is because, the liquidity in the financial system has improved due to steps undertaken by RBI and Government. PSU banks NPA worries are being promptly addressed by the government, while with reduced fresh slippages & improved recoveries, we can say that NPA worries are behind us to an extent. The IBC procedure has strengthened by new policy changes which will increase the ease of doing business in the country and liquidity in stuck projects. Tax cuts and sector specific stimulus measures adopted by government are in positive direction which will provide additional impetus for attracting private investments. In upcoming budget, market expects tax incentives for equity market with reduction in long-term capital gain tax and others. Sector specific incentives and reforms may be provided to key areas like NBFC, realty, infrastructure and auto. This is a good time to invest in Cyclical stocks and sectors like Metals, Energy, Capital Goods and Industrials.

Going ahead, we feel that the economy and risk-appetite will have an upside from hereon. Given liquidity is solid, the momentum is likely to shift from premium stocks to value stock. With reduction in global risk, EMs is likely to attract more liquidity and we are already seeing improvement in PFI’s in the last couple of months. Considering these scenarios, we expect mid and small cap to outperform. We have received a Santa Claus rally so far; however, a short-term consolidation cannot be ruled out as investors are on a holiday mood.