With a rise of over 7% to 11,143 levels, the S&P BSE Mid-cap index has outperformed its larger peers – the S&P BSE Sensex and the Nifty50 indices in calendar year 2015 (CY15) that slipped of over 4%. The Mid-cap index is just 1% shy of its peak level of 11,666 hit on August 10, 2015.
According to reports, of the three calendar years with negative equity returns in the last decade, 2015 has been the only one where in a falling market, Mid-cap stocks have outperformed the large caps.
Among individual stocks, Essar Oil, Ashok Leyland, Britannia Industries, Indiabulls Housing Finance and Aurobindo Pharma are some of the stocks that have rallied over 50% in CY15.
“Conventional wisdom suggests that in years of negative returns, Mid-caps under-perform large cap stocks owing to higher pressure on earnings and lower liquidity in the markets,” said Amay Hattangadi, executive director, Morgan Stanley Investment Management.
"We think India is on a path for gradual and uneven recovery and just because a calendar year has changed does not mean that reality will change. One’s investing style should remain the same in that one should look for growth inflections that seem durable and look for high quality stocks within those spaces," he adds.
Going into 2016, analysts remain optimistic on the road ahead for the equity markets, including the mid-cap segment, which they feel should do well in the first quarter of CY16.
A K Prabhakar, Head of Research, IDBI Capital, says: “Year 2015 outperformance came from mid-caps and more than 50% of BSE 500 stocks have given good returns to the investors. This trend is likely to continue for the next one to two months, post which large-cap stocks will start performing. By June 2016, Nifty can rally up to 9,100 - 9,500 levels.”
In the mid-cap segment, Arvind, Mahindra Holidays & Resorts India, Engineers India, Sintex and Karur Vysya Bank are his top bets.
Kunj Bansal, ED & CIO, Centrum Wealth Management, too, expects healthy return in 2016 as the impact of improved macro-economic growth starts to flow into corporate performance.
“Additionally, corporates will be benefitted by softer commodity prices and reduced interest rates. Thus, the profitability should see an improvement and so should the valuations. Large caps valuation has anyway seen a correction in 2015 which should get rectified due to the expected back-ended growth," he says.
Bansal expects power transmission and distribution, roads and highways and alternate energy sectors to do well in 2016 since these sectors have seen significant spending and investments.
“High investments in these sectors will result in more business which will boost both the topline and the bottomline. Good opportunities will also be available in select auto and engineering companies, NBFCs and some consumption turnaround themes. Select quality midcaps with business models oriented towards generating high ROE/ ROCE will lead the outperformance," he says.
His top picks for 2016 include Bharat Forge, Capital First, Inox Wind, Mphasis, Somany Ceramics and Supreme Industries.
"Earnings expectations have now reset to a lower base. Consensus earnings growth for next year is about 14% and valuations at a P/E of 15 on 1-year forward earnings are at long-term averages. Hence, 2016 should be a decent year for equities and fixed income markets. We expect 15% returns from equities in the next year," says Mihir Vora, Director and Chief Investment Officer, Max Life Insurance.
He further adds, "Our advice to investors is to keep a long-term view on asset allocation. Equities and fixed income asset both look attractive at this point in time and the allocation to these will depend on the individual risk-profile, asset-liability considerations, income, age etc. Equities are likely to outperform fixed income over the long-term but with higher volatility."
He is positive on industrials especially non-leveraged construction companies, private-sector banks / finance companies and auto / auto-part manufacturer.