Foreign institutional investors (FIIs) who are net buyers so far in the year 2020 have consistently raised stakes in around 60 companies in the last four quarters. The majority of the stocks belong to the small & midcap space.
Many small & midcap stock have posted multibagger returns in 2020 as liquidity was chasing stocks which could deliver growth, and at the same time are available are attractive valuations.
Out of 59 stocks in which FIIs consistently raised stake in the last 4 quarters, 10 of them rose 100-500 percent returns so far in the year 2020. These include Deepak Nitrite, IndiaMart InterMesh, Navin Fluorine, IG Perochemicals, Laurus Labs, Aarti Drugs, and Adani Green among others.
Most of the broader market stocks are trading at relatively cheap valuations after two-years of underperformance when compared to the largecaps. With the fall in daily COVID cases, lower interest rates, green shoots visible in the economy, and abundant foreign liquidity stocks in the broader markets have become attractive.
“After a massive sell-off in the month of March, we are witnessing a broader market rally now. Major reasons for foreign inflows into the Indian markets could be India’s consistent improvement, better than expected September quarter earnings and expectation for strong double-digit growth in FY22,” Gaurav Garg, Head of Research, CapitalVia Global Research Limited told Moneycontrol.
“However, the mid-cap and small-cap space was untapped in comparison to the large caps. Abundant liquidity and healthy balance sheets are the key factors that are attracting FIIs. Fundamentally strong stocks should be looked in the mid-cap and small-cap space keeping in mind how they fare with the pandemic,” he said.
What should investors do?
Experts are of the view that most of the small & midcap stocks are running ahead of fundamentals; hence, booking profits would be the right approach at current levels.
Stocks that have given multi-fold returns can be considered for partial profit booking. Look for stocks that have underperformed, suggest experts.“Index is trading at all-time high and currently standing at P/E between 36-37x which can be considered expensive for the Indian stock market. Sooner or later correction is bound to happen. It is advised to book some profits according to the portfolio and hold stocks which haven’t participated in the current scenario or are looking cheap even at current levels,” Nitin Shahi, Executive Director, Findoc told Moneycontrol.
“Adani Green Energy, Laurus Labs, granules had risen 2-4 times in the past 6 months and it is better to book some profits in those stocks. Stocks like SBI Cards, ICICI Securities, Godrej Agrovet, L&T Infotech, Mahindra Logistics looks good at current levels and can give double-digit returns in the medium-term,” he said.
Some volatility cannot be ruled out in the short term, but the current liquidity wave is something which one cannot ignore. FIIs have always been upbeat about Indian equities as they have been net sellers only on four years out of the last 29 years.
Most of the stocks that have witnessed manifold returns are from space/sectors which benefitted due to COVID. The opportunity still exists and will continue to add traction. Investors should either buy the dip or wait for a better entry point.
Garg is of the view that medium- and long-term investors can consider holding these stocks after having a look at their fundamentals and future prospects.
“Short term volatility is likely to be prevalent. Therefore, short term investors can consider booking profits and look for stocks which are under or fairly valued,” he said.
Arjun Yash Mahajan, Head – Institutional Business at Reliance Securities told Moneycontrol that most of these stocks are API and specialty / agrochemical play story, which really worked in the last one year, and these two spaces are likely to see a huge opportunity in domestic markets given the opportunity to shift from China to India.
“Most of these companies have already started witnessing healthy traction in their profitability. The most prudent approach will be to take capital invested home and continue to be invested from the profits earned,” he said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.