Midcaps to lead next leg of market rally: Manishi Raychaudhuri of BNP Paribas

Midcap stocks will lead the next leg in the rally as the market broadens with the Sensex reaching an all time high, BNP Paribas’ Manishi Raychaudhuri told CNBC TV18 on June 21. Manishi sees midcaps and smallcaps posing upward trajectory and in turn lowering the relative valuation premium against largecaps. On June 20, the Nifty Midcap 150 index reached an all time high of 13,256 points.

The market is positioned for a time correction throughout summer, said Raychaudhuri. With the investors taking advantage of the large market blocks, an avenue for private equity investors to exit and promoters to realise the value of their investments is formed.

Expensive investment

However, Raychaudhuri highlighted that with higher volatility in midcaps and smallcaps, combined with a lowering relative valuation premium against large caps, could draw caution from foreign investors. From the foreign investor's perspective, the midcaps and smallcaps are now becoming an expensive investment due to lack of reasonable valuations.

Amidst the surging midcaps and the Indian indices close to all time highs, BNP Paribas places its bets on these three Indian sectors that are seeing consistent earnings estimate upgrades:

• Financials: Analysts have upgraded the consensus earning estimates for this sector by 10 percent over the past six months. The Nifty Bank index for instance has delivered a return of 102 percent over the past three years.

• Industrials: Increased infrastructure projects for this sector have been spilling into capital expenditure. After the Odissa tragedy, the rail stocks have surged beyond 10- 12 percent upon acquiring new projects.

• Consumer discretionary: Sectors such as autos and jewellery have shown exemplary growth. Nifty Auto has delivered a 36 percent return over the past year.

Despite the IT sector being muted over the past six months due to a potential US Recession and reduced IT spending, Raychaudhuri sees potential in the tech and telecom (TnT) universe. He believes that the sector will recover with an increase in global order flows. The growing private and defence capex also bodes well for the infrastructure and industrial space. “This sector has already started performing but it is still in the early days” said the BNP Parbias analyst.