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4 reasons why Midcaps may outperform Large caps
The year 2015 has not been kind to Stock Markets in India, especially in the second half. The BSE Sensex shed nearly 3000 points so far this year. In such a market, when everybody is on the lookout for the silver lining, Midcap stocks have outperformed the Sensex. The BSE Midcap index rose 4% in the first 11 months of 2015 while the Sensex fell 7%.
This superior performance is a continuation from last year when the Midcaps gave more than double the returns than Large caps. This trend is likely to continue in the future too. Let’s look at why Midcaps could shine going forward:
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Economic improvement:
For the past two years, the Stock Market rose on hopes of a recovery in the economy. Moreover, India was considered one of the best investment destinations in comparison with other economies worldwide. The economy too showed signs of recovery. In such an environment, it is usually the Midcap companies that benefit the most. These are companies that are moderately large. As the economy grows, these companies could grow into larger companies in the decades to come. Along with the companies, the share prices too may move higher.
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Rise in investments:
The Stock Market widely anticipates the passage of reform measures by the government. These reforms are expected to fuel investments and consumer demand. This could add $1 trillion to our economy over the next 4-5 years, according to an Economic Times report. If this happens, Midcaps are likely to be the biggest beneficiaries, according to experts. Investors buy stocks in anticipation of future profits. This is why Midcap stocks may be a wise bet today.
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Mutual Fund investing:
At a time when foreign investors have sold stocks in India, domestic investors have come to the rescue. Domestic Mutual Funds (MFs) invested Rs 90,000 crore in Equities the year so far. In November alone, they invested Rs 6,300 crore in Equity MFs. This could continue the Midcap bull-run. "If the trend continues of money coming into domestic funds, which have seen for the last 15 months or so then I suspect the mid-caps will continue to do well, because many of the Mutual Funds are quite adept at finding the right ideas and putting money in Midcaps," said Sanjeev Prasad, Kotak Institutional Equities, as per the ET report.
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Fall in commodity prices:
Global prices of key raw materials like oil and metals have remained low in 2015. In fact, oil prices in the Indian basket hit a 11-year low recently. Iron ore price too fell lower than $40 levels to a six-year low. And these prices are unlikely to climb higher in the next few years. These commodities are an important cost for companies producing goods and services in India. The fall in price helps lower costs for companies and increase profits. This is another reason for Midcap investors to rejoice.
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35%
It is not just Midcap stocks that outperformed Large caps. Even Midcap Mutual Funds have given more than twice the returns as Large cap Funds. In the last three years, Midcap Funds have given around 35% returns, according to an Economic Times report. In comparison, Large cap Funds gave around 16-17% returns.
