Major theme for 2021: Mean reversion in rolling returns, Midcaps and Small caps are chasing large caps

Major theme for 2021: Mean reversion in rolling returns, Midcaps and Small caps are chasing large caps

The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline. We believe volatility will decline significantly in 2021 which will lead to a small and mid cap rally.From a valuation perspective, the Midcaps look attractive vs. large caps. The recent spate of IPOs and their success clearly indicates that the appetite for mid and small cap stocks. Our case for two year rolling returns indicates that the market has turned in favour of small and mid cap stocks which are more reasonably valued and offer greater upside potential.

Diwali Muhurat Picks: A CRACKLING SAMVAT 2077 IN STORE!

Samvat 2076 began on a solid note with outperformance seen in small and mid cap stocks. The beginning of Samvat 2076 was marked by lower market volatility but there were concerns on the economy as GDP growth rate was slowing. However, market returns and GDP growth rate in India do not have a very strong correlation and the benchmark Nifty touched an all time high of 12,371 in the early part of the year which is now considered Pre COVID.

COVID changed everything for the markets and for the world itself. For a brief period it can be said that COVID even had a humbling effect on people. However, as the old adage goes, the more things change the more they remain same. This is so true in the post COVID era. Even as the world came to a standstill and markets plummeted worldwide with crude even entering a negative zone in one contract closing, a semblance of things are not so bad started to emerge. Markets rallied and as the whole system started developing a coping mechanism for COVID and locked down economies started opening up. The COVID challenge has had many ramifications for the businesses worldwide but it has also brought a lot of opportunities for innovative companies.

Samvat 2077 now looks much brighter and this Diwali has brought festive cheers to many, but still there is a long way to go. It seems more likely that growth is likely to come back strongly looking at the high frequency indicators. The Indian banking system has coped well with the pandemic challenges and it is now flushed with liquidity. Interest rates are low and lending is much likely to pick up strongly in the forthcoming quarters. New home registrations are seeing a solid pick up across the metros and housing loans are surging across the banking system. Even looking at the building materials companies results, the demand scenario looks quite encouraging. Housing and banking will be growth themes for Samvat 2077. Pick up in the real estate sector will bode well for the economy as a whole as capacity utilization across the system will improve significantly.

Currently, there are ten good COVID vaccine candidates in phase 3 trials and a vaccination can be expected by early 2021 if not earlier. So, Samvat 2077 will also see the vaccination theme playing out across the sectors. Successful vaccination drive will mean complete opening up of the economy and the most affected sectors like travel and tourism will get a boost. More offices, malls and recreation centres will open up and stocks associated with these themes will pick up steam.

Taking all these factors into consideration, our themes for Samvat 2077 are:

 The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline. We believe volatility will decline significantly in 2021 which will lead to a small and mid cap rally.

 Housing and banking will be major themes to watch out for in 2021 because of correction in real estate prices and lower interest rate regime.

 Digital and telecommunications will continue to remain major longterm structural themes.

 Vaccination drive and complete opening up of the economy will be key factors for growth.

 Growth is now a more certain theme, but growth at a reasonable price will be an even bigger theme to invest which will deliver solid returns over the next one year.

Based on these themes, our Diwali picks are: ICICI Bank, Canfin Homes, SBI, Bharti Airtel, Tech Mahindra, SIS, Eicher Motors, Dalmia Bharat, Varun Beverages, Dhanuka Agritech and Aarti Industries