Nifty MidCap 100 Index had its best day in more than two months Tuesday but is still near the cheapest in five years relative to NSE Nifty 50. (Abhijit Bhatlekar/Mint)
Nifty MidCap 100 Index had its best day in more than two months Tuesday but is still near the cheapest in five years relative to NSE Nifty 50. (Abhijit Bhatlekar/Mint)

Kotak MF picks battered midcap stocks to ride election season

  • Midcap and and smallcap stocks are trading at a discount to their historical averages after the recent selloff
  • Kotak Asset Management plans to gradually boost its exposure to midcap and smallcap stocks relative to largecap peers

Mumbai: Investors looking for opportunities to make money in India’s election year will most likely find them in the battered corner of the nation’s $2 trillion stock market: mid-cap stocks.

Mid- and small-sized companies are trading at a discount to their historical averages after the recent selloff, and the fund house plans to gradually boost its exposure to them relative to their larger peers, Nilesh Shah, chief executive officer of Kotak Asset Management Co., said in an interview.

“It is like going down the beaten-down path and trying to find jewels," said Shah, who helps oversee $24 billion in assets. “While some stocks corrected for the right reasons, you have to pick those where there’s a mismatch. Assuming valuations support us, we may get overweight small- and mid-caps toward elections" that are due by May, he said.

His strategy may prove to be timely. The Nifty MidCap 100 Index had its best day in more than two months Tuesday, extending two straight weeks of gains amid easing cross-border tensions and resumption of purchases by foreigners.

The gauge’s valuation is still near the cheapest in five years relative to the benchmark NSE Nifty 50 Index, signaling potential for further gains.

Smaller companies, stars of India’s market in 2017, were at the receiving end of the selloff that roiled India and other emerging nations last year. The Nifty midcap gauge closed 2018 with a loss of 15%, versus a 3.2% gain for the Nifty Index, as investors sought the safety of the biggest stocks amid headwinds from the trade conflict and rising oil prices.

The divergence persisted until recently, with the midcap gauge dropping to its lowest level since October in mid-February, even as the Nifty reclaimed the 11,000 level. On Wednesday, the rally in midcap shares gathered steam, putting the NSE MidCap 100 Index on course for its highest level since 18 January

“We want to avoid paying too much of a valuation premium for the comfort of a name, or a brand, because overpaying invariably catches up with you," Shah said, referring to large-cap stocks that have been this year’s popular trade.

‘Downside Protection’

India has sat out the rally that’s driven Asian equities to a four-month high as the flare up in tensions between India and Pakistan added to the uncertainty surrounding the upcoming elections. While Shah declined to comment on the skirmishes, he remains unfazed about the outcome of the national ballot.

“Irrespective of the government at the centre, if you have bought stocks where there is growth and downside protection in terms of valuation, the portfolio will outperform in the days to come," he said.

Bloomberg's Ravil Shirodkar contributed to this story.

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