Investing in midcap companies is a challenge. You want to pick quality stocks and hope that a few eventually turn into potential multi-baggers or large caps. Stories of people buying Bajaj or HDFC twins in the early 2000s and making money by simply holding on to their investments are part of the folklore. However, when you learn about a potential winner, it is already trading at a record peak market value. In such a situation, assessing whether the timing is right for you to invest is tough.
On one side, you have the immense potential for future growth. Conversely, you are worried that the stock has enough steam to move up.
Typically, mid-caps are supposed to outperform large caps in the long run. If you see the trend of the S&P BSE midcap since April 2003, the index has jumped nearly 30 times while the broader BSE Sensex rose 20 times in value. However, large caps have outperformed the mid-caps over the past five years. It indicates that investors choose to be with defensive large-cap stocks and not take risks on relatively more minor companies. Over the past five years, financial markets have gone through a global pandemic. Interest rates have gone up significantly, and that makes most investors risk-averse. Globally, there was a risk-off strategy.
While corporate and bank balance sheets have improved substantially over the past five years, and new investors have joined financial markets, there are concerns about future growth. High inflation and slow growth could lead to stagflation in the rich world. In India, the growth is primarily driven by government expenditure on infrastructure. As such mid-cap companies in that space continue to do well.
If you are already investing, analysing businesses’ financials and estimating their future profits is not easy. That is despite of voluminous data at your disposal. You want to buy into a future winner. However, you need to take a closer look at numbers and see them in the significant picture context.
Logically, one could argue that it is time for midcaps to outperform the large-caps. However, there is a fundamental problem. The latest data on credit growth and demand shows a surge in bank credit for micro, small and medium enterprises or MSMEs. Micro and small enterprises have done well over the past year, with credit growth surging by over 50%. However, the data for medium enterprises is a sign of worry. It showed a growth of only 8%. The RBI data up to January 2023 indicated a much lower demand for credit from medium-sized businesses. That could indicate concern for companies looking to break the shackles after the pandemic.
You may want to identify the future winners by analysing the data more. The other option for you is to use Alphaniti.
Demand for credit from MSME soars, defaults dip: Cibil data – Times of India
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