Mid-caps stay away from pre-election market rally

Written by fe Bureau | Mumbai | Updated: Mar 12 2014, 19:36pm hrs
MarketA month ahead of election, BSE mid-cap index had outperformed the Sensex on average by 5%. PTI
Even as expectations of a favourable election outcome have pulled the broader market, the mid-cap stocks have lagged their bluechip counterparts in the pre-election run-up. This is in stark contrast to the packs behaviour in a similar time during the last two general elections in 2004 and 2009.

Back then, a month ahead of election, the BSE mid-cap index had outperformed the Sensex on average by 5%. Conversely, in the last one-month when the Sensex has rallied 7% to a new all-time high even as the mid-cap index gained only 5.4%

Although the latest market rally is also based on hopes of revival in the economic growth and business confidence as the BJP led National Democratic Alliance (NDA) is seen leading the poll tally, the street still appears cautious in dealing with the mid-cap stocks given the decayed financials of the mid-cap space as a whole. Over 50% of BSE mid-cap constituents have yielded negative returns in last one year while a similar number of stocks continue to trade in red for 2014 so far.

Market experts believe that unless the signs of economic recovery are corroborated with a turnaround in indicators like GDP growth and interest rate cycle, it may take time for the investor interest to come back to mid-cap space with a certainty.

According to Piyush Garg, CIO, ICICI Securities, formation of a stable and pro-policy government is a necessary but not a sufficient condition for the turnaround in economic growth.

The mid-caps require a set-up of strong economic growth trajectory and increased business confidence which may materialise after the general election. However, it may be too early for those hopes to channel towards these stocks that have largely underperformed in the last two years, added Garg.

This rationale was substantiated by the mid-cap companies performance in the previous two instances (2004 & 2009) when the mid-cap index had outperformed the Sensex by 12% and 26% for the year.

In a latest strategy report, Citi in a risk on scenario highlighted that investors who believe NDA may come to power after the election, should go aggressive on domestic and mid-cap focused portfolio.

Given that the latest market rally is driven by FIIs that are selective in picking up mid-cap stocks may also be a reason for the relatively lower gains by the mid-cap index. In last one month, the FIIs have made a purchase of $1 billion in Indian stocks.