Top mid cap picks: Mid cap rally can last a while in a conducive/improving economic environment Our analysis of 11 years of price data supports the thesis that mid cap stocks are a high beta play on economic growth/recovery and tend to have a prolonged period of sharp and sustained outperformance. Between Apr’03 and Jan’08 – a period of strong economic growth – the BSE Midcap index rose 10x
while the Sensex rose 6x. Similarly, in Mar’09 to Nov’10 – when India’s economy returned to high growth after the sub-prime crisis – the BSE Midcap index returned 242% vs. 156% for the Sensex. Recently, the mid cap index has outperformed by 12% since Aug’13, which should continue as the mid cap index has significant room to catch up after almost three years (Nov’10 to Aug’13) of severe underperformance of ~30%. A sustainable mid cap rally could also help reignite retail investor interest, leading to higher inflows for domestic institutional investors. An adverse electoral outcome and any delay in economic recovery are the key risks to the continuation of the mid cap rally.
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