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This article was first published 4 years ago  » Business » 'Quality mid-caps can outperform this year'

'Quality mid-caps can outperform this year'

By Ashley Coutinho
January 08, 2020 09:00 IST
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'We expect gradual recovery in the demand environment in 2020, driven by low interest rates, government spending, and rural recovery,' says Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India).

Illustration: Dominic Xavier/

We expect gradual recovery in the demand environment next year, driven by low interest rates, government spending, and rural recovery, says Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India).

He tells Ashley Coutinho the valuation of mid-cap discount to large-caps may narrow in 2020 as risk aversion goes down.


Edited excerpts:

What is your market outlook for 2020?

We expect gradual recovery in the demand environment in 2020, driven by low interest rates, government spending, and rural recovery.

Globally, there seems to be some positive development on the US-China trade war, while on the domestic front we don't expect negative surprise on the macros.

We believe that many of the ongoing reforms will lay the foundation to a new cycle of stable growth.

We advise investors to stay invested in well-managed funds for the next three-five years.

What is your take on valuations?

From the corporate earnings point of view, the consensus earnings growth is currently pegged at about 21 per cent compound annual growth rate from 2019-20 to 2021-22, led by financials and oil & gas, implying price-to-earnings multiples of 17.6x the 2020-21 earnings, which seem reasonable.

Earnings are low, compared to long-term averages, given that the profit after tax-to-gross domestic product (GDP) ratio at 2.5 per cent is at a 15-year low.

What is your view on mid- and small-caps as investment bets?

A large part of CY18 and CY19 was characterised by widening of discount of mid-caps and small-caps versus large-caps.

The MidCap index is trading at a discount of 12-15 per cent to large-caps against a premium of about 35 per cent two years back.

As economic growth bottoms out, liquidity stays benign, corporate earnings pick up, and risk aversion diminishes, we expect the valuation discount of mid-caps to narrow vis-a-vis large-caps in CY20.

That said, we expect only the well-run and quality mid-caps with good balance sheets and cash flow characteristics to outperform.

We are in the midst of a slowdown and consumer spending has somewhat taken a hit. What is your reading of the situation?

After August 2019, the Centre announced several steps to arrest growth slowdown.

The upcoming Union Budget, too, could lay the path for recovery.

The central bank has lowered interest rates by 135 basis points since February 2019.

A combination of both fiscal and monetary response should feed into the growth impulse in CY20.

A late sharp recovery in monsoon, leading to higher reservoir levels, also augurs well for rural economy and consumption.

Overall, from a macro perspective, we believe GDP growth is near to bottom and should see a gradual recovery in CY20.

The markets, however, have risen since September without any improvement in fundamentals. How much of a concern is that for you?

We continue to hold the view that markets will be the lead indicator of macroeconomic revival, and of the much-awaited earnings recovery.

The earnings are at cyclical lows.

You are already a top 15 player in the mutual fund space. What are your plans for the year ahead?

We have built a good platform and are looking to graduate to the capacity of a complete asset manager.

We would like to increase our book size in debt in the coming months and announce our presence in the exchange-traded fund market with a range of products.

Our equity product range looks complete at the moment and we would continue to build track record in them.

Mirae Asset is also beginning its journey in other areas of financial services.

We are in the process of completing our internal restructuring of forming a holding company.

The AMC will become a subsidiary of the holding company.

This would enable our promoter to infuse further capital and grow into areas like real estate and venture capital.

What is your advice to investors?

Investors should stick to their asset allocation and work closely with their advisors.

Wealth is invariably created by the ability of investors to remain disciplined.

In times like these, it is easy to stray from the defined path.

The challenge is to not let that happen.

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Ashley Coutinho in Mumbai
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