Midcaps near all-time highs: How should you trade them now?

Shweta MungreMoneycontrolIt has been a buoyant start to the year for Indian equities. Strong domestic flows, absence of any major negative surprises in the Budget and a general lack of alternative investment options have overshadowed the worry of demonetisation delaying earnings recovery.

While both the headline indices – the BSE Sensex and NSE Nifty - have also clocked healthy gains in the run-up, the star performer has been the midcap index. Since January 1, the BSE Midcap has risen close to 12 percent, more than the 7 percent rise in the 30-share Sensex. Liquidity surge, and beaten-down valuations after demonetisation, with some stocks shedding 30-40 percent, could have driven investors to them.  

According to Sanjay Mookim, Director, India Equity Strategy at Bank of America Merrill Lynch “domestic liquidity tends to be attracted to smaller companies where people believe they have an edge, where they could generate some sort of an alpha perhaps.”

But it is a tough call on how long the expansion in valuation premium will last. Sanjeev Prasad of Kotak Institutional Equities says it is already getting hard to find quality midcaps with right valuations. Some non-banking finance companies (albeit with strong business models), for example, are trading at 3-4 times FY18 book value making them more expensive than the likes of HDFC Bank or HDFC.