Higher volatility and steeper earnings downgrade have not deterred investors’ interest in the mid-cap space. The mid-cap index on BSE is still giving a tough fight to its bleuchip counterparts in 2015, trying to sustain its last year’s outperformance.
On Tuesday, the mid-cap index hit a record high of 10781.36 as twenty index constituents touched their all-time highs. With Tuesday’s addition of 47 points or 0.44%, now the mid-cap gauge has added 60% since 2014 compared to 36% gains made by the bluechip Sensex.
Tuesday’s rally was driven by stocks like Prestige Estate Projects (up 10.8%), Aban Offshore (6%), also as financial services providers Edelweiss Financial Services (4.6%), Muthoot Finance (4.6%), Indiabulls Housing Finance (4.4%) and Corporation Bank (4.3%) added to index gains. Some of the stocks that hit their all-time high include MRF, WHirlpool, Symphony, Prism Cement and Indiabulls Housing Finance.
As retail investors return back to equity markets, the trading interest in mid-cap stocks has seen a rebound. While it is difficult to pinpoint the contribution of mid-caps in the cash market volumes, the increased trading activity in stock derivatives is seen reflecting the heightened attention towards midcap stocks. In 2014, the average turnover of stock futures and options on the National Stock Exchange (NSE) witnessed a jump of 58% and 34% to R6.2 lakh crore and R2.6 lakh crore.
Notwithstanding their remarkable outperformance last year, investors seem to have taken advantage of higher volatility in the mid-cap space. In 2014, on average the monthly trading range of the BSE mid-cap universe was more than two times the average breadth in which the 30-share Sensex moved every month.
The broad based rally in mid-cap space has led to a re-rating of the entire pack including some stocks from the infra, construction and steel sectors that still have weak fundamentals. Despite some moderation in earnings expectations over the next two years, the mid-cap index now boasts a higher forwards valuations (PE multiple of 16.3) than the Sensex (15.81). The consensus FY16 earnings expectations for BSE mid-cap index now stands at R706 compared to R746.4 at the beginning of this fiscal, depicting a correction of 5%. The Sensex EPS (earnings per share) estimates still point to 2.5% growth.
Not surprisingly, experts are stressing on bottom-up approach for selecting mid-cap stocks and are recommending stocks from various sectors like housing finance, consumer goods, auto ancillary and pharma.
For instance JPMorgan recently short-listed its six mid-cap picks including LIC Housing and Pidilite based on bottom-up analysis that indicate positive earnings revisions and further room for expansion in valuations.