Mid-caps to outperform in ‘risk-on’ environment: RBS

Our Bureau Updated - November 20, 2017 at 09:29 PM.

Edinburgh-based international banking and financial services company Royal Bank of Scotland is betting on mid-caps to outperform large-caps in the Indian markets in 2013.

Thing of past

“With the Government focused on kick-starting the capex cycle and improving the business environment, we expect improvement in mid-cap earnings going forward which could lend share prices higher,” said Rajesh Cheruvu, Chief Investment Officer, RBS Private Banking — India.

The bank believed that the trend of mid-caps suffering from the triple whammy of a slowing Indian economy, policy paralysis and rising interest rates as investors turned more risk-averse was a thing of the past.

“Mid-caps are attractively priced with valuation gap between Nifty and the CNX Midcap index having widened over the past few years. Valuations favour mid-caps with relative PE ratios below their historical averages,” the foreign bank said in its 2013 India Outlook report.

According to RBS, factors such as global investment climate improving, receding risk of Euro Zone break-up, improved outlook for the US and China and easing liquidity conditions as central banks around the world continue to keep interest rates low would accentuate the ‘risk-on’ environment which would in turn work in favour of mid-caps.

Note of caution

The report also added that the CNX Midcap had returned compound annual growth of 24.3 per cent over the last 10 years while the Nifty generated 21 per cent over the same period.

However, the firm also added a note of caution while going in for stock selection in mid-caps. “Mid-caps shares carry an inherent risk of higher volatility which makes stock selection important.

“We favour well-managed, cash generative companies with advantages in brand, distribution and innovative technology which have demand for their goods and services underpinned by aspirational consumption.”

The firm is also betting on a comeback of equities this year on grounds that bonds are no longer the haven asset they were perceived to be. It pegged the Nifty target for 2013 at 6,600.

Cheruvu said: “Expectations of recovering growth in 2013 led by both fiscal and monetary policy are predicted to trigger a recovery in earnings momentum and outperformance of the market in the year. We expect returns to be in line with earnings growth and maintain our overweight stance on equities versus bonds.”

“While the trend of sub-6 per cent growth is likely to persist in the very near-term, a combination of expansive economic and monetary policy combined with low inflation should help growth rates recover, support domestic consumption and improve the level of investment-led demand from the second half of the year,” he said.

Manisha.jha@thehindu.co.in

Published on January 22, 2013 14:24