Investors Should Sell All Mid Caps In India, Says JPMorgan's Sanjay Mookim
Mid-cap performance can be anticipated by the Reserve Bank of India's liquidity stance, Sanjay Mookim said.
Investors should consider selling mid-cap stocks, as a lack of liquidity is unhealthy for the sector, according to JPMorgan's Sanjay Mookim.
Mid-cap performance can be anticipated by the Reserve Bank of India's liquidity stance, Mookim, strategist and head of India equity research at JPMorgan, told BQ Prime's Niraj Shah.
"When the RBI flows liquidity, mid caps do well, whereas when the RBI pulls back liquidity, mid caps start to underperform."
According to him, the RBI has withdrawn liquidity from the market over the last six months while raising rates. Based on quantitative correlation, a lack of liquidity in the market is bad for beta mid-cap sectors in India, he said. Hence, Mookim recommends "selling" all mid-cap stocks.
Outlook On IT Stocks
JPMorgan is not bullish on the IT sector due to concerns about a slowdown in growth. It doesn't expect margin expansion in the down-cycle, "because negative operating leverage can be too hard to handle".
Most of the large caps and mid caps in IT are trading at a premium to their own historical valuation and at a premium to 2019 levels, he said. Therefore, decelerating growth, debate on structural trends, and high valuations do not make the sector attractive enough yet, according to Mookim.
Key Themes
In terms of mid caps in sectors such as infrastructure, specialty chemicals, and building materials, Mookim suggests investors "erase it".
According to him, if an investor is buying for structural growth, the returns have to be looked at from the perspective of the growth cycle. There are mid caps in certain themes that are doing well as volume growth looks attractive across multiple years, but these need to be held on to, Mookim said.
"One can't buy a mid-cap stock at an attractive valuation that has a growth horizon of five years and expect returns in three months," he said.
Chemicals, light engineering goods, processed food, and private hospital healthcare are some sectors that look secular, Mookim said.
Some of these themes may not look statistically attractive, Mookim said. "(But) Once you start to see sector momentum operationally, that momentum lasts a while." So, one can be more confident about buying in an uptrend rather than anticipating it with aggression, he said.
According to him, the stocks in the staples category look attractive as they are the best defensive sector in India. Financial and real estate sectors, too, are good bets, while one needs to be selective with healthcare, Mookim said.
Perspective On Indian Market
The Indian market needs another year of consolidation, according to Mookim.
Despite the flat-to-negative returns last year, valuations weren't just above average but higher than December 2019 levels during the pre-Covid period, he said. This is especially true given that liquidity has gotten tighter and rates have increased from pre-Covid times, while Indian multiples have a different behaviour, Mookim said.
According to him, earnings have been deteriorating as well and the combination of high valuation and weak earnings calls for a period where earnings can see some growth, so that headline valuations become slightly more reasonable, he said.
It is difficult for the Reserve Bank of India to cut rates before the U.S. Fed or anticipate the Fed's actions, because the rate differential—market rates, corporate bond rates, etc.—between India and the U.S. is still very narrow, Mookim said.
This is driving capital out of India and giving very little room for the RBI to cut rates because of independent reasons. he said.
Narrative On Inflation
Mathematics suggests that if inflation falls in the U.S., it will follow suit in India as commodity prices will decline, which will have a higher base effect, Mookim said. This means a steady decline in the CPI in the U.S. will be seen by the end of the third quarter, he said.
"This hints at a pause in monetary policy tightening at some point in the middle of the year. But the problem is that the market is actually pricing in a pivot, which means that as soon as monetary policy tightening hits a pause, central banks will begin cutting rates."
Therefore, the debate is whether or not the conditions will be right for central banks to be cutting rates in the second half of the year and the consequential reaction of the equity markets, he said.
JPMorgan's base case for the S&P 500 implies a 15% to 20% decline from current levels, Mookim said.