Midcap rally not a bubble; like PSU banks, cap goods:Expert

The recent rally in midcap shares is just the beginning of a sustained uptrend, and not a bubble waiting to burst, says Ratnesh Kumar, independent market expert.Year-on-year, the CNX Midcap has risen 79 percent compared to a 38 percent rise in the Nifty index during the same period.In an interview to CNBC-TV18, Kumar says both fundamental and technical factors are in favour of midcaps outperforming."To my mind, this is just the beginning, and there will be more opportunities to pick from; I don't see it as a bubble waiting to burst," he says.Fundamentally, midcaps are more leveraged to the recovery in the economy, says Kumar. As to technical factors, he says domestic savings are back into equities through mutual funds.Kumar says traditionally, domestic investors have had more conviction about investing in midcap shares.But he cautions that investors will have to pick the stocks carefully, as the broad sectoral story does not apply to midcaps.Kumar sees the market consolidating for the next three to six months as investors seek more comforting data points about a recovery in the economy.He advises investors to position their portfolio in anticipation of an economic recovery. Kumar is bullish on capital goods, construction and state-owned banks as he feels these sectors are the best play on an impending recovery."Construction stocks are interesting because you alredy have orders coming from the government side on highways etc.," he says, adding, "on the equipment side, it is going to take longer for the recovery to be visible. The EPC space also looks promising on a long term basis."On state-owned banks, he says the valuations are already discounting concerns relating to non-performing assets.Most state-owned banks are trading at 0.5 time book value, and positives like government's support to these banks in the form of equity capital, and an impending economic recovery makes the risk reward ratio attractive, he says.Kumar feels the FMCG space will underperform as investors will be reluctant to pay the exorbitant valuations they did some time back when they were looking for safe havens.With the economy poised for a turnaround, investors will be betting on growth stories an don't defensive stories like FMCG, he says.On big investment themes in the making, Kumar feels defence could turn out to be a great story."But it is going to be a 5-7 year kind of a story. Looking for defense (sector) plays in the listed space is a bit premature," he says."Market likes the story, so whenever there are stocks that seem like defense plays, there is excitement. But in terms of actual earnings impact, it is going to take a while," he says.