For investors who are investing for the medium to long term midcaps offer a good opportunity

What are your views on the state of the Indian economy? Can we expect to see some recovery in consumer demand over the next few quarters?

The current consumption slowdown is indeed a challenge. However, this slowdown has to be seen in the light of high growth seen in the past 2-3 years on account of easy credit availability which probably advanced current consumption. Other challenge is issues with credit availability for mid and small sized businesses. This has ramifications given that these small and midsized businesses are large employers, and many of them are part of the distribution network, thus effecting the entire value chain. At the macro level, weak tax revenue growth is a concern as it affects the fiscal situation. Against this, there are positives like stable oil prices, low channel inventory, deleveraging by corporates, steps by the government to improve ease of doing business and good monsoons helping the rabi crop.

The Sensex and Nifty are trading near their all time highs now. Are you concerned about valuations?

The performance of large cap indices like Nifty 50 and S&P BSE Sensex in last 18-20 months has not been broad based. The market seems to be rewarding select large cap stocks that have demonstrated stability of business and growth in earnings despite the challenging environment when economic growth and consumer demand has slowed, credit has dried up and capital expenditure cycle is weak. This situation has become more accentuated as fresh fund inflows into the markets have also disproportionately gone to these select stocks as investors have avoided risk. While valuations in these select stocks are elevated, we believe that incremental money will flow into other stocks wherever there are pockets of strength in fundamentals.

What is your general outlook on corporate earnings growth over the next few quarters? Are there sectors where you are seeing signs of earnings growth recovery?

The earnings outlook for FY 20 seems to be muted. With good monsoons, which will benefit the rural economy and farm income, fiscal and monetary steps taken by the government and RBI, earnings growth are expected to start showing signs of improvement in FY21. We believe earnings growth will be led by sectors such as Banking & Finance, Consumer, Building materials, and Telecom.

Midcap stocks have come down considerably from the 2017 / early 2018 highs. What are your views on midcap valuations? While midcap valuations may not be as cheap as in 2008 or 2013, are there attractive investment opportunities in the midcap space now?

The relative over valuation of the midcaps over large caps has corrected and now the mid cap indices are trading at a small discount to the large cap index. Over the past quarter we have seen the breadth in the markets improve and smaller large caps and midcaps have also been part of the rally. We believe that relatively attractive valuation of midcaps coupled with the strong fundamental story behind many mid cap stocks and the improving breadth in the markets makes it a strong case for investments in this segment.

You will launch a midcap NFO in the next few weeks. What will be the investment philosophy of this fund?

The fund would be managed though our robust investment process, asset allocation and stock selection. We will follow a bottom up approach to stock selection and will aim to build a diversified portfolio of around 50-60 stocks with exposure across sectors. The universe of stocks will be selected to include companies having a robust business model and enjoying sustainable competitive advantages with earnings expected to grow better than other companies in their sector.

Please describe in brief the stock selection and sector strategy for your upcoming fund?

Many mid cap companies are leaders in their own niche segment and have a strong connect with the end consumer or are often significant part of the supply chain to large cap companies. Well run mid sized companies have features of a large company like a good governance structure and efficient capital allocation while being run by an enterprising management team executing to deliver growth. Potential opportunities in midcaps would be in companies which are seeing consistent earnings growth, companies undergoing business transformation or restructuring to re-focus their business on the high growth areas, companies focusing on value migration leading to improving margins or those where intrinsic value is being unlocked as a result of corporate actions etc. Lastly, as the Indian economy has evolved and many new sectors have opened up like organized retail, e-commerce, healthcare, movie exhibitions, logistics, etc.provide good investment opportunities.

Do you think that this is a good time for investors to allocate some money in their portfolios to midcap funds? Please explain why?

For investors who are investing for the medium to long term, midcaps offer a good opportunity. The valuations of Midcaps, which were trading at a relative premium to large caps, have cooled off and companies in this segment are currently available at a discount to the large caps. Over the last few months, we have seen the breadth in the markets improve and smaller large caps and midcaps have also been part of the rally. We believe that relatively attractive valuation of midcaps coupled with improving fundamentals and the possibility improving breadth in the markets make it a good time for investing in them with a long-term view.

Midcap funds as a category have underperformed large cap funds in the last 1 year. Even on the basis of trailing 3 year returns midcap funds underperformed large cap. However, if we look at last 5 year returns, then midcaps have outperformed. How should investors, especially new mutual fund investors, approach midcap funds?

Midcap segment of the market tends to be more volatile than the large cap segment. However, data shows the potential of midcaps to outperform large caps over longer investment horizons. Therefore, investors could allocate a portion of the portfolio to midcaps based on their risk appetites, investment horizons and financial goals. Investors may use the SIP and STP facilities to invest in such funds. The Principal Midcap Fund provides the SMART facility that enables investors to stagger their investments over the next 3 months based on market movement.

Disclaimers:

The views / opinions/ beliefs/ expectations contained herein are the independent views of the investment manager and are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. The views and strategies described may not be suitable for all investors. The sectors referred above should not be construed as recommendation from Principal Asset Management and/or Principal Mutual Fund. The scheme may or may not have any present or future positions in these sectors. The views given above may change from time to time without any notice. Investment strategy stated above may change from time to time and shall be in accordance with Scheme Information Document.

The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.

The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

Mutual fund investments are subject to market risks, read all scheme-related documents carefully.