Mid-cap stocks attract fund managers this season

MUMBAI: Mid-cap stocks are the flavour of the season for fund managers who have helped many such stocks decisively outperform large caps in the stock market in recent months. The BSE Midcap Index has surged 30 per cent since August last year against 18 per cent rise in the benchmark 30-stock index, the Sensex.

With improving economic environment and lower interest rates, Deutsche Bank expects the mid-cap segment to continue to outperform the Sensex. “Despite a 30per cent gain in the mid-cap index since August 2013, we believe the mid-cap rally is likely to extend further. Mid-cap stocks tend to rally sharply when economic growth is expected to be at an inflection point,” the bank said in a report. It pointed out that mid-cap stocks are not that expensive compared with their long-term average valuations.

The BSE Midcap index is trading at a one-year forward price-to-earnings ratio (PE) of 11.9 times versus its long-term average of 11.4 times while its price-book value (PBV) ratio stands at 1.5 times against its longterm average of 1.4 times, the report added. Some of the mid-cap stocks from BSE 500 universe have made major gains since August. Stock price of Ceat soared 322per cent since then, followed by Tata Elxsi (213per cent), TVS Motors (212per cent), KEC International (176per cent) and Apollo Tyres (147per cent).

According to the Deutsche Bank report, a sustainable mid-cap rally could also help reignite retail investor interest, leading to higher inflows for domestic institutional investors. It, however, warned that an adverse electoral outcome and any delay in economic recovery could derail the mid-cap rally. Deutsche Bank maintained its constructive outlook on the market, with a December 2014 Sensex target of 24,000.