In our equity outlook for 2020, we had said that opportunities lie in some pockets and that a broad-based recovery is some time off. So, where are the opportunities and what strategy can you follow?
First, start deploying. If you’ve been averse to stepping up investments because markets were high, stop waiting. Markets do not wait for concrete numbers but react to early signs of a turnaround and this is already underway as explained in the outlook.
Second, if you have a surplus to invest, invest a part of it right away. You can either invest in the funds you already own or the suggestions we have below. Maintain a portion of your surplus in cash to capture any market volatility through the year, as there may be hiccups based on data flow and global events such as the US elections, central bank actions across developed countries and the EU, and trade wars. You could also consider building up a surplus to capture such opportunities if you do not immediately have it.
Deploy into mid-caps and small-caps
Choose mid-cap and small-cap funds to first park any surplus. This market segment may not deliver immediately, but it is an opportune time to invest here from a medium to long-term perspective. Here is why.
- It has gone through two years’ correction. From price-valuation standpoint, it is far better than large-caps. Buying around the bottom of an economic cycle will work in its favour as they can benefit much more from a growth revival than large-caps. In fact, aggregate revenue and operating profit growth for mid-cap stocks have come in stronger at 6.9% and 9% respective in the September 2019 quarter than the 0.74% and 1.3% respectively for large-cap stocks.
- In the same vein, cyclical stocks and sectors can see a bigger payoff than defensives and consumption from a growth-driven investment demand revival. Several of such stocks and sectors, such as niche engineering and industrial companies, auto ancillaries, export players are present more in the mid-cap and small-cap space than in large-caps.
- Mid-cap and small-cap funds follow a stock-specific bottom-up strategy. Therefore, they may be more adept at spotting small winners than multi-cap funds even though the latter invest across market cycles. This apart, mid-cap and small-cap funds have lesser portfolio overlap than multi-cap and large-cap funds. Existing large-cap exposure through multi-cap and index funds will be sufficient to provide exposure to rallies in the large-cap companies.
If large-cap and moderate-risk multicap funds make up more than 55-60% of your long-term portfolio and you do not have a surplus to invest, you could consider booking profit in some of these and redeploy them into mid-cap and small-cap funds based on your risk appetite.
If you wish to remain out of the pure mid-cap/ small-cap segment owing to your low risk appetite but still wish to maximise opportunities, look for large-and-mid or multicap funds that follow a value-based strategy. These may see better participation in a rally than growth-based funds. Similarly, multi-cap funds that follow a focused, bottom-up strategy with higher mid/small-cap allocations may be a good diversification, if your portfolio already holds a high share of large-cap index funds and/or large-cap funds.
Funds to choose
Consider any of the funds listed below, based on what you may already hold. The funds are drawn both from Prime Funds and outside it. We have looked for portfolio and strategy to make our choices more than past performance. We have moved beyond the Prime Funds list to spot funds that haven’t performed well in the past, but whose portfolios and strategy may hold them in good stead – this could also amount to buying on lows.
| Fund name | Category | Rationale |
|---|---|---|
| Invesco India Contra (Prime Funds – moderate risk) | Equity - Contra | Follows a core value-based strategy while keeping a small portion in earlier value picks that have run up. Takes up to 30% exposure to mid-cap stocks, and is an option for the more risk-averse |
| Motilal Oswal Nifty 500 (Prime Funds – index) | Equity - Index | Broad-market index that can capture opportunities across the market cap curve and may be difficult for multicap funds to beat. An option for both the risk-averse and high-risk. |
| Kotak Emerging Equity (Prime Funds – high risk) | Equity - mid-cap | Aggressive mid-cap fund that looks at the smaller stocks within the mid-cap range. Consistent outperformer. |
| IDFC Sterling Value | Equity - Value | Value fund holding 80%-plus of its portfolio in mid-cap and small-cap stocks. Captures upsides very well, but falters both on downside containment and volatility |
| DSP Smallcap | Equity - Small-cap | A once-stellar fund that got thoroughly beaten up in the small-cap correction. Showing signs of a recovery, and holds stocks across multiple cyclical and other beaten-down sectors. |
Kindly note the following:
- All of these funds require a long-term holding period – they are not picks for the year 2020 alone. We have tried to identify entry points for these based on our outlook for the current year.
- Our point is that 2020 is a good time to accumulate equity with a long-term perspective, as growth appears to be bottoming out, broad-market valuations are attractive post correction, and markets can rally on anticipation of growth. We have identified which pockets of equity can perform better.
- The funds we have picked outside our Prime list carry higher risk. We are conscious of the lower rating (which is based on past performance) of such funds. Prime Funds, on the other hand, are far more consistent by nature. You may therefore decide to stick to the more consistent performers from our Prime list or take a conscious risk-return call, if our choices appeal to you.
- Make sure that in your overall equity allocation, mid and small caps do not account for over 30%.
14 thoughts on “Prime Strategies – Equity markets 2020: Opportunity to capture the lows”
Hi Bhavana,
Your articles and recommendations are crisp and to the point. Please keep up the good work and I am pleased to have subscribed to your services. Can I suggest if you could look at international funds and recommend a few for diversification rather than being just India specific? After all India is just a small pie in the world economy. Some of the world class companies are not available to local investors. I have investments in Motilal Nasdaq FOF & ETF, ICICI US Blue chip and FT US opportunities fund since few years and the experience has been very good. I was thinking of adding an Asia specific fund covering China, Hong Kong, Japan , Taiwan, Thailand etc. Grateful if you could do some deep dive and recommend a few funds.
Thanks
Vittal
Hello Sir,
Thank you! Regarding international funds, yes, we do have one fund in our recommended list. Regarding Asia funds…at this time, we’re a little wary of adding them to portfolios, since a lot of their market drivers overlap with our own. So it may not be a diversification, so to speak. We will definitely be exploring more international options, that we think are good additions to a portfolio.
Thanks,
Bhavana
Hi Bhavana, what would be your recommendation for one fund which covers mid + small caps, other than IDFC Sterling Value listed in the article?
Thanks
Hi Rajkumar,
We’ll create a ticket and respond to your question there, since it’s easier for us to keep track of what we’re telling you. In future, you can send a mail to contact@primeinvestor.in.
Thanks,
Bhavana
Hello Mam,
Under the current scenario in the last 2 weeks , with our large caps have melting, i am re reading your report , to fund new buys into my portfolio . In this scenario , should we move towards slightly large cap orientation like Invesco india growth ( again picked from your recommended portfolio ) rather than invesco contra ( as value / reasonable valuation has spread into nifty 100 scripts also) ?
And can i completely avoid the DSP small cap , and only begin SIPping in kotak emerging – as generally smallcaps score at the tail end end of bull run. Or alternatively choose franklin prima who pick midcaps in larger side ? Lastly ,Does it make sense to buy a nifty 500 etf, as the scripts( 100 ~ 500) would be 0.0xx % holding .. Instead why not have a combination of N50 + Next 50 ?
Vivekraj
Hello sir,
Yes, you can avoid small-cap if your risk and timeline don’t allow for it, and Kotak Emerging is aggressive enough that you can avoid small-cap. While small-caps do recover only in the later part of a bull cylce, timing it correctly can be hard. So you can delay it a few months if you wish to, but do be aware that markets can pick up before you realise it. Between Invesco Growth and Contra, both actually can take similar mid-cap calls. Their strategy is where they are very different. You can pick either. And finally, yes, you can certainly buy the index instead of funds. You can either do the Nifty 500 or a combination of Nifty 50 and Nifty Midcap 150. Refer this article, where we give you levels to invest, and explain which index combination to go for.
Thanks,
Bhavana
Hi Bhavana,
Regarding your statements “It has gone through two years’ correction. From price-valuation standpoint, it is far better than large-caps. ” – can you please share some data?
If possible, kindly consider to include the data in your article.
Thanks,
Kannan.
Hi Kannan,
A lot of the data is actually in the outlook article, where we’ve said that the bulk of the Nifty 500 is trading below market PE. Of the mid-caps and small-caps in the index (and we take the Nifty 500 as it covers almost the entire listed market), 72% of them are trading below their 2017 PE multiples. We’d prefer not to take only the index PEs, as that can sometimes get skewed especially in the small-cap space.
Thanks,
Bhavana
Hi Bhavana,
Thanks for this article and suggested fund list. I am holding Franklin Prima which is part of Prime fund so I can chose to invest there right? Can you elaborate profit booking point. Is it advisable to book profit only if our returns are high from Large or Multicap or that is not necessary if we are strategically putting money in mid or small cap (maintaining max 30% allocation).
Is Parag parikh long term equity considered as Value based fund in your analysis?
Kotak emerging is mistakenly mentioned as multicap in the article.
Regards,
Prakash
Hi Prakash,
Thanks for noticing the error – will correct. Yes, you can invest in Franklin Prima if you have it. It is a less aggressive fund than the ones we have put into the list since it tends towards the larger end of the mid-cap spectrum. However, it does follow a value-based strategy. Pn booking profit – please do so only if you have enough profit there and you do not have an amount to invest already. The point was made only for those who did not have a ready surplus to invest already and who had a high share of large-caps, and that only if they wanted to play the opportunity.
Parag Parikh Long Term is value in strategy and we consider it so. But we do not rate or analyse value funds separately. It is a multi-cap fund that follows a value strategy, just like ICICI Pru Value Discovery or Invesco Contra are also multicap by nature that follow a value strategy. So we go by market-cap orientation, and use strategies for analysing performance. Hope I’m being clear here…see the “comparing it right” point in this article where we explain our rating strategy: https://www.primeinvestor.in/2019/12/03/primeinvestor-ratings-how-we-rate-funds-and-why-were-different/
Thanks,
Bhavana
Thanks Bhavana,
your points are clear and so is prime rating strategy. Reason for my question was you said that those who want to avoid mid or small cap fund for they can continue investing in a multicap fund which follows follows a value strategy. In the article you suggested Invesco Contra, I am holding Parag Parikh so I wanted to confirm whether it can be alternative here for this. also will it be a good strategy to do investments in midcap / small cap only or distribute equally in multi-cap fund that follows a value strategy and a mid or small cap?
Any reason why more aggressive funds are chosen here?
Regards,
Prakash
Hi Prakash,
Parag Parikh actually will have an strong influence of foreign stocks, since these stocks form a third of their portfolio. It can (and it has, also) underperform in a strong bull market. That said, it is a great fund to have in your portfolio. If you do not have too many funds, you can consider adding Invesco Contra. Else, Parag Parikh is still a good choice. You can do multicap+mid/small cap if you are moderate risk, and only mid-cap/small-cap if you are high risk. Either way, cap mid/small exposure at 30%.
Thanks,
Bhavana
Thanks for the fund suggestions. This is a good strategy although quite obvious to an astute observer of markets considering most large caps have run up without much in the way of earnings growth while mid and small caps have remained stagnant.
Do you foresee any market impact from the growing social turmoil? Also, any thoughts on the strength of the rupee and RBI dividends to govt.
Thank you.
Hi Fahd,
Social turmoil – yes, it can affect markets depending on how intense it is and whether markets perceive policy changes and whether it affects economic activity. The rupee is a factor of global fund flows and central bank action plus our own rate scenario, so it’s hard to call. The RBI dividend to the government is more a sentiment factor that markets will temporarily pay attention to.
Thanks,
Bhavana
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