Resurrection of mid-caps on cards post September 2019

The Indian markets have hit rock-bottom at the time when they were touted to boom. The markets reacted positively when the post-poll survey in May third week predicted Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) to return for another term. The BSE Sensex and NSE Nifty touched their record levels.

Sensex and Nifty breached 40,000 and 12,000 points respectively for the first time. The boom in the markets was such that the foreign portfolio investors (FPIs) started pumping massive money into the Indian capital markets, citing favourable amendments from the newly elected government.

In June first week, the Indian markets were in such a phase where investors found them exciting. As per the depositories’ data, the FPIs pumped in as much as Rs 10,384 crore into the Indian capital markets in June 2019. They took the buying trend to the next level. They invested Rs 2,272.74 crore in equities while Rs 8,111.80 crore in the debt instruments in June. 

The above positive developments were seen amidst the liquidity crisis, a slowdown in the economic growth, falling auto sector and rupee. The post-poll survey completely put the negative factors behind and made the benchmark indices to rise to their record levels. Indian markets were doing good until the Union Budget 2019-20 was amended on 5 July 2019. 

The investors were hopeful of Nirmala Sitharaman, the current Finance Minister of India, to make their lives easy. The Union Budget 2018-19 saw the reintroduction of tax on LTCG, which was abolished in 2004 and replaced by the Securities Transaction Tax (STT). This Union Budget 2018-19 amendments meant that the equity investors have to pay LTCG tax in unison with STT. 

The investors were expecting the Union Budget 2019-20 to offer some relief on their outgo, but they are disappointed as the budget did not touch upon their concerns. The increase of surcharge on the super-rich has added to their woes. The Finance Minister later clarified that the increase in taxation of the super-rich is here to stay for quite some time, and this affected the market sentiment, leading the markets to crash.

Citing the unfavourable market developments, the FPIs reversed their buying trend. They have now turned their back on the Indian markets by pulling out Rs 3,700 crore so far after the Union Budget 2019-20 was presented on 5 July 2019. The equity segment is the worst hit due to the selling trend of the FPIs. Many FPIs are shifting from equity to debt to safeguard their investments as the bearish trend has firmly gripped the markets.

On the mutual funds front, fund managers are investing heavily in the top ten stocks of the NSE Nifty 50. This trend was previously seen when the sub-prime mortgage crisis shook the World back in 2008-09. The top ten Nifty 50 stocks are considered stable, and they are little affected due to the market movements.

Also Read: Outflow of FPIs in July exceed Rs 3,700 crore from Indian equity market

However, the Nifty 50 is not expected to fall beyond 10,000 in 2019 as that would devalue the Indian market and result in large-cap stocks being sought after by the investors. The bounce-back of mid-caps is much anticipated soon. Following are the reasons why we can expect mid-caps to surge in October: 

1. The bond yield is currently 6.35%, which is the lowest in three years. This means the Government of India now has the least amount of money in the last three years. To boost this, the government will focus more on developmental activities such as laying roads and improving the existing infrastructure. This will result in the creation of jobs in private companies that are mostly mid-cap.
2. RBI is expected to slash the lending rated by a minimum of 75 basis points till early 2020. This move will translate into a lower borrowing cost for businesses and industries. Mid-caps will then have more funding options for their expansion.
3. The consumption is expected to rise as the festive season is fast approaching. Also, the auto sale usually increases during the fag end of the year.
4. The Indian banks are seeing settlements from the existing indisciplined borrowers, and this enables the banks to be in a position to lend to new corporates in the near future.
5. 41 lakh new demat accounts are registered in 2019 so far, which is the highest ever number in a single year.

The Indian markets might look bleak now, but it will not be for a long time. The Indian Government and the Reserve Bank of India (RBI) will eventually work it out to boost the consumption, liquidity and, economy, which is good for the mid-caps.