JPMorgan’s Bharat Iyer Advises Caution On Mid-Cap Bets

The JP Morgan logo is displayed on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Scott Eells/Bloomberg)

Even as analysts and veteran investors bet on a rebound in beaten-down mid-cap stocks after Narendra Modi's return to power, JPMorgan's Bharat Iyer advises caution: tank up on mid caps only after the building blocks of economic growth are in place.

“On a one- to two-year basis, I will be circumspect,” Iyer, head of India research and India equity strategist at JPMorgan, told Bloomberg Quint in an interview. “Only when we know that there will be two-three year run of very good growth of 7-7.5 percent. That is when you will go and tank up on mid caps.”

Nifty Midcap 100 fell about 15 percent last year even as the benchmark Nifty 50 closed 3.5 percent higher as a liquidity crisis and trade-war concerns weighed on stocks. The poor run continued in 2019 with the mid-cap gauge falling 0.3 percent against a 9.5 percent increase in Nifty 50 so far this year. But the mid-cap index started rebounding in mid-May as investors expected Modi's return to power.

Still, the larger concerns about a slowdown in the economy remains as multiple indicators from auto sales to volume growth of consumer goods makers suggest a decline in consumption. And the liquidity crunch stemming from last year's defaults by IL&FS group persists.

Iyer expects earnings to drive the market. “For us, earnings will continue to recover nicely which works from an equity standpoint. In the first nine months of this year, earnings adjusted for exceptionals have been growing at 15 percent, Iyer said. “The fourth quarter seems okay and we are factoring a 15 percent earnings growth for the year. This is after four to five years of mid-single digit growth. I think we will repeat in next year as well.”

And if you have a 15 percent earnings growth, the market will give you 6-8 percent through the end of the year, he said, highlighting JPMorgan's target price of 12,500 for Nifty 50 for the second half of FY20.

Banks, according to Iyer, will continue to do well. “There are multiple tailwinds here. Credit costs have peaked. Loan growth is recovering very well. We are back to 15 percent loan growth after a long time and policy is supportive.”

Infrastructure is another sector where Iyer is bullish. “The other theme which will do well is government beneficiaries in infrastructure because we believe that it will take off in a period of time,” he said. “We have already seen the manifesto of BJP. They are going to be investing $1.5 trillion in next five years.”

Watch the entire conversation here: