Equity Markets: Mid-Cap Bets For Long Term Investors - Axis Direct
Sep 23, 2019 | Source: AxisDirect-O-Nomics
A bright future awaits mid-cap markets
The Indian economy is facing a slower growth phase lately, which combined with other issues, like the escalation of the US-China trade tariff war and FPI selling, led to a correction in equity markets. Nifty50 has corrected sharply from its peak in the last one and a half month while the broader mid-cap and small-cap market has seen a much sharper downfall. For instance, Midcap 100 has been down by more than 15% since July 2018 from its high of Jan 2018. But this is not the first time that mid-cap markets are seeing a risk aversion and this is definitely not the worst.
Given the present scenario, what should an investor do if one had invested during the peaks of January 2018? Well, if the past data is anything to go by, the best strategy would be to look at the stock portfolio and hold onto businesses and sectors that have good growth potential, competent and quality management, and are optimally leveraged to get rewarded well over a 5-7 year period. By doing so, investors would be able to recover their funds, even if they had invested at the beginning of the downward market cycle, in less than 3 years.
To give you a perspective, say, a long term investor, Mr Optimist, invested in Midcap 100 index in Jan 2008, when it was at its peak of 9655 (worst possible time of investment). In the year 2008-09, when the world was hit by the financial crisis, Mr Optimist witnessed the worst drawdowns with over 70% investment value erosion. He, however, held on to his investments, hoping for a recovery. By Nov 2010, Mr Optimist was rewarded for his patience as the Midcap 100 reached the level of 9673, completely recovering from its worst drawdown in less than 3 years of investment.
The above example concerns a period when there was a structural collapse of the global financial system following the Lehman Brothers bankruptcy. The present slowdown, however, is not a structural downturn but a cyclical one. To understand the impact of a cyclical slowdown on investments, let us look at another scenario. Let us say our Mr Optimist invested in November 2010, when Nifty Midcap 100 was at the peak of 9782. His investments would have dropped by more than 38% by early 2012. Waiting for recovery would have rewarded him by May 2014, when Midcap 100 reached 9908, this time in 3.5 years of investment. If he held onto to his investments for another 3.5 years, he would have gained a respectable CAGR of 12% over 7 odd years (Dec 2010 end to Jan 2018).
What the past data suggests is that even when one has invested his entire investment in the worst possible time, there is still a very high possibility of complete recovery in investments and then some good returns. The present downturn has been going on for almost one and a half years now in the Midcap space and going by historical data, a recovery should happen in another year or so. Investors should remain optimistic, review the reasons for their investment and if those reasons are still relevant, stay invested. For new investors, this can be a very good time to keep investing in a staggered manner for the next year to get superior returns on their investment when the cycle turns.
Another interesting point is that every time there has been a slowdown across major economies, revival has come immediately after the government’s increase in spending, stimulus packages and accommodative stance by the central bank. Public investment through infrastructure building, for instance, revived the US economy through the Great Recession of 2007-09 coupled with accommodative federal bank policies. China, Germany have also come out of their downturns several times through enormous government spending for long periods. Back home, the erstwhile Indian government had taken appropriate measures in 2008-10 to address the then growth concerns.
Government has recently announced demand boosters for auto and financial segments ensuring the fiscal prudence is maintained thus keeping the cost of capital low and is further working on plans to give demand boost to infrastructure and other key segments. RBI has also emphasized persistently about the need to revive demand and have reflected the same through their rate cuts along with the continuation of accommodative stance. These are exactly the measures required for the economic upturn to start and broader markets would be the first to react to these measures. This gives us confidence that the recovery is not far ahead. But going forward, the Indian government is required to undertake additional measures for a continued period till private spending sentiment picks up and capacity expansions kick in from corporate bodies to ensure the economic engine roars, loud and clear.