Wednesday April 11, 01:57 AM
Baby's day out |
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After many months, the market seems to be spreading out a bit. Midcap stocks have shown some signs of recovery in the last few sessions. Stocks like SRF, ITI, Bata, Gujarat NRE Coke, which have been deep underperformers since May last year, have started moving again. Cats and dogs are moving as well, with the likes of LML hitting upper circuits - but that is inevitable. It is premature to say whether midcaps are finally ready to snap out of their long slumber, but recent moves are encouraging.
It is easy to argue the case for midcaps. For a market which has strong fundamental headwinds and where large caps are not exactly screamingly cheap, it is logical to move towards the battered midcaps where valuations are far more compelling. A large number of midcaps are still 25 to 50 per cent off their 52-week highs. The problem with this space is sentiment. Domestic investors shy away from this space everytime there is a savage correction, like May 2006. Even domestic equity funds with large exposure to midcaps have been licking their wounds for the last nine months and been busy rebalancing their portfolios.
The key to midcap outperformance is market stability. Once the volatility recedes and investors get the feeling that the worst is over, they will get back to the business of picking good stocks. Right now, everything hinges around a market call, and people are just too reactive to every macro development. Midcaps generally don't do well in such an environment. What is certainly not desirable now is another sharp crack which rattles confidence and pushes midcaps back into their shell. Since January nearly Rs 4,000 crore has been raised by various flexicap and midcap NFOs; if Infosys does not shock on Friday this money may flow into midcaps, accelerating their outperformance.
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