TREND: Mid
cap shares saw selling by MFs on valuation peak concerns
Domestic
mutual funds took the sustained rise in mid cap index to book profit in select
stocks last month to sell shares in companies from the index and partially book
profits, but continued to be on a net buying spree in small cap stocks.
The number
of shares held by mutual fund schemes in Nifty Midcap 150 companies declined
nearly 1% on month in August, following a 4.2% increase in the previous month,
analysis of mutual fund data showed. The
mid cap index ended August 3.6% up on month making it the fifth consecutive
time it rose on month. From Mar end to Aug end the index had risen 29.4%.
It
indicated a paring of exposure by mutual funds in mid cap stocks which analysts
point out was likely selling stocks where valuations were considered to be at
peak or near peak levels. Brokerage Nuvama Institutional Equities said in a Sep
15 report that mid cap stocks warranted caution due to above-mean valuations
even as it did not see it as a bubble.
The
on-month decline in mutual fund holding of mid cap shares in August was the
second time in six months. There was a 2.8% dip in June.
In the mid
cap selling action in August, mutual funds cut their exposure the most in GMR
Airports Infrastructure Ltd, Patanjali Foods Ltd, The Supreme Industries Ltd, Ashok
Leyland Ltd, Bharat Heavy Electricals Ltd, and Natco Pharma Ltd. The paring
ranged from 15% to 40% in these stocks. In all mutual funds reduced their
exposure in 65 mid cap index companies in August, up from 57 in July, the
analysis showed.
The mid cap
index is the only broad based one currently trading at a historical premium
over Nifty 50 on a trailing price to earnings basis, Samco Mutual Fund's chief
investment officer, Umeshkumar Mehta told Informist. The euphoria has led to
valuations peaking and probably led to fund selling, he said.
The mid cap
index has rallied more than 40% over past six months "and currently
undergoing a healthy retracement," said brokerage ICICI Securities in a
report on Sep 18.
The August
selling action in mid cap index was notwithstanding a rise in net inflow in
dedicated midcap funds to 25.12 bln rupees from 16.23 bln rupees in July. As
per Securities and Exchange Board of India's rules, a mid cap fund need to
invest minimum 65% in mid cap stocks. Most mid cap funds tend to have invest in
large cap stocks after fulfilling the minimum 65% condition. Multi cap fund and
flexi cap funds also hold mid cap stocks in their portfolios.
IN CONTRAST
Unlike the
trend in mid caps, mutual fund holding in small cap Nifty Small Cap 250 index
companies jumped nearly 10% on month in August after staying nearly flat in the
previous month. Like it mid cap peer, the Nifty Smallcap 250 index has been
rising on month without a break since March end, and in August it recorded a
3.1% rise on month.
In the case
of shares of large cap companies, aggregate mutual fund holding went up 2.7% on
month in August as compared to 1% increase in the previous month. This seemed
to be on account of opportunity buying as the Nifty 100 index, which comprises
of 100 large cap stocks, declined in August ending 2.4% lower than its July end
level.
Going
forward, analysts are cautious about the valuations in both, mid caps and small
caps and expect fund managers to seriously explore profit booking
opportunities.
Brokerage
Kotak Institutional Equities noted in its strategy report on Sep 11 that many
of the new favorite mid-and-small cap stocks of institutional and retail
investors are in the investment sectors such as capital goods, defense,
electronics manufacturing services, railways, real estate, and renewables.
"These
stocks have delivered eye-popping returns in the past 3-6 months… we expect a
decent investment cycle, but we are not sure about the quality of many of the
stocks given their historical weak execution and governance
track-records," the report added. The brokerage attributed the steep
increase in such stocks as reflecting irrational exuberance of investors. End
https://www.informistmedia.com/trend-mfs-pare-exposure-to-mid-cap-index-shrs-on-valuation-concerns/