Looking to buy beaten down midcap stocks? Morgan Stanley’s Ridham Desai shares the best time

By: | Updated: June 5, 2018 2:29 PM

Even as midcap stocks continue to see vicious selloffs in recent times, Morgan Stanley's Ridham Desai noted a 5% correction in the space cannot be ruled out.

According to Ridham Desai, valuations and earnings are catching up and adjusting to reality.

Even as midcap stocks continue to see vicious selloffs in recent times, Morgan Stanley’s Ridham Desai noted that a 5% correction in the space cannot be ruled out. Speaking to ET Now on the sidelines of Morgan Stanley Investor Summit on Tuesday, Ridham Desai, head of India equity research and managing director said that the midcaps have not yet bottomed out, and the stocks may see further correction. Notably, the S&P BSE Midcap Index has corrected by more than 13% in the year so far. According to the expert, largecaps will continue to outperform midcaps in the medium-term. Midcaps will have to fall more before they become a buy, he told the channel.

A recent report by UBS too contended that the global research firm is underweight in the small and midcap space in India. “The overall market risk-reward seems to be unattractive at current levels and SMIDS (small-midcap stocks) are currently trading at about a 20% premium to Nifty, though historically they have traded at a discount,” the firm noted.

According to Ridham Desai, valuations and earnings are catching up and adjusting to reality. Taking stock of the domestic flows, he said that DII inflows have remained largely positive in the recent times. “Foreign investors have been pulling money out of India. Their overweight position on India has declined. We are at 2011 levels. They are still overweight but it has come down significantly. So you can tell that they have been persistently disappointed by India’s lack of growth and they are stepping aside,” he told in another interview to CNBC TV18.

Notably, while Ridham Desai sees further pain in the midcap stocks, his outlook on Sensex remains positive. Even if mid caps don’t move up much in the 12 months, Sensex can move up significantly in the next 12 months. Bond markets is factoring in high growth ahead. Stocks will eventually follow high growth, he said. Yield curve surging to a 7-year high is an indicator of good growth ahead.

So, what are his top bets? According to Desai, corporate banks will turn around in the next 12 months. “Consumption growth is coming back and the private corporate cycle is coming back. The credit growth will speed up after corporate cycle picks up,” he said.

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