Key reasons why Kotak Institutional Equities drops the recommended mid-cap portfolio

Amid the ongoing outperformance in the broader markets, Kotak Institutional Equities dropped its recommended mid-cap portfolio as it could not find too many stocks beyond the BFSI space that offer decent potential upside to its 12-month fair value.

Sharing its view on the decision, the brokerage said that valuations of stocks in their favourite capital goods, healthcare, QSR and real estate sectors discount growth for the next few years and leave absolutely no room for any disappointment.

“We would have had to remove these stocks from the portfolio anyway, as it would be incorrect to recommend stocks with low conviction and potential downside to our fair values, which would have left a portfolio comprising BFSI stocks largely,” Kotak Institutional Equities.

The BSE MidCap and BSE SmallCap indices have gained 33 per cent and 31 per cent, respectively, in the ongoing calendar year. On the other hand, the benchmark equity index BSE Sensex has rallied 10 per cent during the same period.

The brokerage added that it sees limited point in trying to find fundamental reasons behind the steep increase in stock prices of several midcap and small-cap stocks.

There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases.

“Many of the stocks have jumped in the past few months (some within weeks of inclusion in the portfolio). We have changed the portfolio frequently in the past few months to keep up with rampant stock prices, but have largely run out of options now. It is obvious that we have not developed some special stock-picking skills recently. In our view, the steep increase in stock prices simply reflects the irrational exuberance of investors in the midcap and small-cap parts of the market,” Kotak Institutional Equities said.