March 2019 has marked the return of FIIs in our markets.  Most stocks were upwardly poised and we witnessed a much anticipated relief rally in Small and Midcap stocks.  At Plus Delta Portfolios we have been constantly urging investors to increase their allocation to small and midcap stocks and feel the rally will continue to be broad based. The market breadth has improved and as indicated in the previous letter, the market has moved up as the breadth has improved.

Strong FII flows have set the mood right 

Since the beginning of Feb 19 FIIs have bought close to ₹ 46k crores into equity. These flows have come at a time when there have been geopolitical disruptions around the order. In our view, there was always an uncertainty discount that was being attached to Indian markets by FIIs owing to the elections, I think in the recent past the uncertainty discount has been erased and we have had a catch up trade. Lately, FIIs have started showing a lot of interest in the Indian debt markets and have bought ~₹ 10000 crores so far this in this month alone.

FII/FPI Investments have returned

Source: NSDL, as on 26th March 2019

FII flows are here to stay!

We believe that the FII inflows will be stable and will set the stage for higher growth for the markets. Currently, the markets have already cognized the dovish stance and lower rates hikes by the US fed for the current year.  On the macro front our trade deficit is narrowing, oil prices are expected to be stable and the rupee is displaying strength all of these factors will help safeguard FII money. Moreover, if one observes historical data, FII inflows have always been high in an election year so 2019 will continue to see strong FII flows coming in.

Election Years always attract high FII flows

Source: NSDL

Significant improvement in market breadth!

To gauge the improvement we analyzed the number of stocks that were trading above its 200 day moving average on a Month on month basis for the past one year.  March 2019 data indicates that the bulls are slowing ascending as 400 stocks have moved above their 200 DMA’s compared to just 268 in Feb 19, further this number has hit a 12 month high indicating that sentiment is reversing in the market.

In our earlier letter we argued how investments were being hurdled into small pockets of mega caps that have worked but now we are seeing the trend changing and the rally is more broad-based.

Focus should be on Midcaps that have remained irrepressible!

Midcaps displaying earnings visibility are the best bet in the current scenarios. At Plus Delta portfolios we are looking at those select midcap stocks that have suffered least price damage in this fall. The stocks that have corrected the least will still have trend strength and will be the first to recover and will rally the most.  Most Midcap stocks are currently available at 2014 level valuations. Historically after all major 14 month corrections in NIFTY midcap Index, the average minimum return for the following year has been 40%.

Midcap stocks have always delivered positive return after one negative year

Source: Bloomberg

Markets move in cycles and last year we were caught in the downside of the cycle, we have bottomed out now and the cycle is turning. It is still early days but the market is presenting a fantastic opportunity to build a portfolio from a 3-5 year perspective.  We have lived through the worst, it’s now time to back up the truck and take advantage of the best rally that is about to hit the markets.

Stay invested and keep a long term focus and we will definitely create disproportionate wealth across the next few years.

(The Author… Mr. Aditya Iyer is the Fund manager of Plus Delta Portfolios the PMS vertical of Growth Avenues – www.growthavenues.com)