MUMBAI (Reuters) - Indian asset managers plan to increase their holdings of cheaper mid-cap shares in coming months, signalling increased confidence about the economy and the outlook for inflation despite looming general elections, according to a Reuters poll.
The survey conducted January 3-7 shows 10 out of 16 fund managers expect to increase their allocation to mid-cap companies in the January-March quarter. The rest plan to leave their exposure unchanged.
A shift towards mid-caps would come after blue-chip exporters such as Tata Consultancy Services Ltd (TCS.NS) rallied last year on the back of heavy foreign buying, pushing Indian shares to record highs on December 9.
Fund managers also plan to increase holdings of battered banking shares, reflecting another bet the economy is bottoming out, and that the central bank will stop raising interest rates as inflation wanes and as the current account deficit (CAD) narrows.
"As some of the concerns around CAD and inflation begin to wear off, we see greater confidence in these smaller companies especially as some of the blue-chip names are starting to look over-valued," said S. Naren, chief investment officer of ICICI Prudential Asset Management Co.
The preference for mid-caps comes after the National Stock Exchange's mid-cap index fell 5.1 percent last year, despite strong gains in the last four months, in sharp contrast to the 8.9 percent increase in the Nifty.
As a result, the mid-cap sub-index is trading at a price-to-earnings ratio of 10.9 times one-year forward earnings compared to 13.6 for the blue-chip-laden NSE, according to Thomson Reuters data.
After the blue-chip rally last year, only two fund managers said they would increase allocation to large-caps, with eight staying neutral and six planning to reduce holdings.
Poll graphic link.reuters.com/tab85v
However, a move to mid-caps is fraught with risk ahead of general elections due by May.
Hopes that Narendra Modi, the prime minister candidate of opposition Bhartiya Janata Party, would win those elections contributed to a rally in Indian shares late last year.
Any changes to expectations for a BJP victory could hit shares, particularly riskier mid-caps.
Meanwhile, India's economic prospects remain uncertain, with growth in the year ending in March expected to fall below the decade low of 5 percent in the last fiscal year.
At the same time, inflation has remained elevated. The Reserve Bank of India raised interest rates twice last year, and analysts expect it to tighten monetary policy should consumer or wholesale prices remain high.
Indian shares have fallen 2.3 percent so far this year, reflecting some of those concerns.
Nonetheless, fund managers believe the worst may be over.
The Reuters poll showed 10 out of 16 fund managers said they will increase their holdings of public-sector banks such as State Bank of India, while six said they will increase holdings of private-sector banks.
"There's significant value in those franchises from a medium-term perspective and clearly today these banks are trading at stressed valuations, so as and when you see a recovery in the broader economy we will see a much stronger recovery in their asset quality," said Pankaj Murarka, head of equity at Axis Mutual Fund.
Banking shares were hit hard last year as the slowing economy raised the prospect of an increase in bad loans. As a result, asset managers cut their portfolio allocation to 17.4 percent as of the end of November from 21.40 percent at the start of 2013, according to regulatory data.
Meanwhile, asset managers indicate consumer goods shares are now their least favorite, with 10 of 16 asset managers planning to cut their allocations to consumer durable stocks, while nine expect to reduce holdings in non-durables, known in India as fast moving consumer goods (FMCG) companies.
Expensive valuations are playing a role. India's cigarette maker ITC Ltd (ITC.NS) and consumer conglomerate Hindustan Unilever Ltd (HLL.NS) both peaked at all-time highs in 2013 before retreating in the back half of the year.
Editing by Rafael Nam & Kim Coghill