Despite a 30% gain in the mid cap index since Aug’13, Deutsche Research believes the mid cap rally is likely to extend further. Mid cap stocks tend to rally sharply when economic growth is expected to be at an inflection point. While the jury is still out on the pace of economic recovery, we believe that growth has bottomed, currency has stabilised and the twin deficits have shown a marked improvement.
These factors should be favourable for an economic recovery, which could be further bolstered by a decisive electoral outcome. Mid cap
valuations do not seem expensive with the BSE Midcap index trading at a 1-yr fwd PE of 11.9x (vs. the LT average of 11.4x), while on a PBV basis the index trades at 1.5x vs. a LT average of 1.4x. Top mid cap picks: Bharat Forge, HPCL, Jain Irrigation, LIC HF, Shree Cement, Shriram Trans Fin and Yes Bank.
