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People walk past the Bombay Stock Exchange building in Mumbai, India. Image Credit: Reuters

Mumbai: Just 15 stocks have accounted for almost all the $51 billion (Dh187 billion) climb in India’s stock market this year. Now the smaller fry might be about to join the party.

“We have given a call to our clients to start accumulating small and mid-caps,” said Nilesh Shah, chief executive officer at Kotak Asset Management Co., who helps oversee $25 billion in assets. “Somewhere here the bottom is being formed.”

With borrowing costs tumbling thanks to Reserve Bank of India’s interest-rate cuts — and more such reductions anticipated — the cheaper valuations of stocks that have been laggards during India’s rally may lure buyers. Also set to help, in Shah’s narrative: the Modi administration’s bigger-than-expected capital infusion in state-run banks, and a pickup in monsoon rains that will aid agriculture. A rebound in small and mid-size enterprises may emerge by the festival season starting in two months, when consumer spending often picks up.

“We put all this together and we will suddenly see small and mid-caps rallying,” Shah said in an interview in his office on Wednesday.

Kotak has been gradually raising its exposure to the segment. The mid-cap oriented Kotak Emerging Equity Fund — with an average annual return of 17 per cent over five years, beating 98 per cent of peers — recently raised holdings of Supreme Industries Ltd., a maker of moulded furniture, and Coromandel International Ltd., a fertiliser maker, data compiled by Bloomberg show.


decline experienced by the Nifty mid-cap gauge last year

Others, including CLSA India Pvt., also expect mid-sized businesses to benefit from efforts by Prime Minister Narendra Modi in his second term in office to lift growth from five-year low. The valuation of the Nifty MidCap 100 Index is near the cheapest since 2012 relative to the benchmark NSE Nifty 50 Index, suggesting a potential for rebound.

Smaller companies — the stars of India’s market in 2017 — underperformed during the sell-off that roiled India and other emerging nations last year. The Nifty mid-cap gauge closed 2018 with a decline of 15 per cent, versus a 3.2 per cent gain for the benchmark Nifty Index, as investors sought the safety of the biggest stocks amid headwinds from the trade conflict.


divergence between Nifty mid-cap gauge and Nifty index

The divergence persists, with the mid-cap gauge down about 6 per cent so far this year, even as the Nifty climbed to a record high last month.

“Polarisation is very sharp,” said Shah. “The super large caps are trading at exorbitant valuations and have pulled up the market. But there are many stocks that haven’t done very well.”