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Last Updated : Jan 16, 2020 11:41 AM IST | Source: Moneycontrol.com

Midcaps could continue to outperform Nifty in coming months: Credit Suisse

The global brokerage expects moderate returns in 2020 due to the weak growth environment in the near term, but hopes of major reforms are likely to keep investor interest high in Indian equities.


The market has been in an uptrend for more than three-and-half-months on the account of positive global and domestic cues. The Nifty50 rallied more than 15 percent during the same period and the broader market played catch up with benchmark indices.

In the past one month, the NSE Midcap has delivered a return of 5.3 percent versus the Nifty index's 3.4 percent. And the same outperformance is likely to continue in the coming months if economic recovery takes place as per expectations, experts feel.

The major reason behind this rally was the government's initiative to revive slowing economy that fell to 4.5 percent in Q2FY20 and is expected to end the year with around 5 percent growth. On the global front, things started improving as the US and China signed phase one trade deal.

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Hopes of sops from the government in the upcoming Budget has also lifted the sentiment.

"We expect that the valuation gap between midcaps and large caps will narrow depending on the macro recovery. If growth becomes broad-based from here, midcaps could continue to outperform Nifty in the coming months," Credit Suisse said in its latest report.

The global brokerage expects moderate returns in 2020 due to the weak growth environment in the near term, but hopes of major reforms are likely to keep investor interest high in Indian equities.

"We do not expect further downside in midcaps as valuation froth has settled and the sharp underperformance provides selective opportunities in quality midcaps," it said.

In a benign interest rate environment globally, equity risk premiums have contracted lifting valuations across global equity markets, including India, it added.

The Nifty Index 12-month forward PE valuation has expanded to 18.6, which is 1.5 standard deviation above its 10-year average.

Credit Suisse expects the valuations will remain elevated given India has become structurally more attractive to foreign investors as various structural measures taken by the government in the past have increased confidence in the formalization of the Indian economy.

"This structural shift is visible in heightened foreign direct investments (FDIs) as well as FPI flows in trailing 12 months, it said.

Foreign institutional investors net bought nearly Rs 40,000 crore worth of shares in 2019.

India's earnings growth does not look as bad as the economic slowdown suggests, the brokerage said. "Despite downward earnings revisions so far, the Nifty earnings could still grow at mid to high teens for FY20–2021 in our view, offering one of the highest growth among global peers benefiting from corporate tax cuts and lower provisioning needs."

For Q3FY20, consensus expects the Nifty index earnings to grow in mid-teens with large part of this growth led by earnings recovery in corporate lenders, it said.

The third quarter earnings season (October-December), so far, has been mixed. Infosys raised its full year guidance with stable Q3 numbers, but IndusInd Bank reported sharp increase in its slippages which dented sentiment.

In terms of sectors, Credit Suisse prefers private banks, chemicals, and selected financials that are linked to rural growth revival. "Urbanization is a structural theme, and we expect the sectors linked to this theme to do well," it said.

Meanwhile, the Indian rupee weakened to 72.15 against the US dollar amid rising oil prices and Middle East tensions, but erased all losses as oil prices cooled off on easing geopolitical tensions and US-China trade deal.

According to the brokerage, the USD could likely weaken on the back of risk-on sentiments led by signing of the phase-one trade deal between the USA and China and ebbing of the tensions in the Middle East. "Weakness in the dollar could lead to higher capital flows into emerging markets, including India."

Credit Suisse said its forex team has turned positive on the rupee against the USD in the near term and revised USD/INR target for 3-month to 69.5, while maintaining the 12-month target at 72.5.

"While the current backdrop is positive for the INR, any escalation of geopolitical risks – not our base case - could undermine the positive sentiments, in our view," it added.

CPI inflation jumped to 7.35 percent in December (the highest since July 2014), from 5.54 percent in November, which was well above the market expectations of 6.7 percent. In fact, the inflation surpassed the upper band of the RBI's target range (4 percent plus/minus 2 percent) on the back of higher food inflation.

Meanwhile, core inflation grew marginally to 3.75 percent (against 3.5 percent in November) led by higher telecom tariffs.

"Our macro economics team expects that CPI in January will be similar to that of December, pushing second half of FY20 inflation well above MPC’s 4.9 percent forecasts and believes that the repo rate cuts appear unlikely till June 2020," Credit Suisse said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jan 16, 2020 11:41 am
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