Kotak stops mid-cap recommendations due to rally driven by irrational exuberance

Kotak stops mid-cap recommendations due to rally driven by irrational exuberance

Kotak Institutional Equities has decided to stop recommending Indian mid-cap companies due to the remarkable surge in the mid-cap index this year. The domestically focused mid-cap index has reached numerous all-time highs, posting a 31% gain, outperforming the benchmark Nifty 50 index by a significant margin. However, Kotak analysts express concerns about a potential market correction and attribute the rally to irrational exuberance among investors. The primary driver seems to be high-return expectations driven by the recent strong performance. According to the brokerage, it is difficult to find fundamental reasons behind the steep increase in stock prices. As a result, most of the stocks in Kotak’s model mid-cap portfolio are currently trading near their fair values for the 12-month period. The brokerage has found limited opportunities for significant upside potential outside of the banking, financial services, and insurance (BFSI) sector, with only five BFSI stocks in the portfolio. Kotak analysts argue against recommending stocks with low conviction and potential downside to their fair values, citing deteriorating company fundamentals in many cases. They also highlight the underperformance of institutional investors’ favorites in the fashion, consumer goods, and retail sectors due to weak consumer demand. Additionally, Kotak raises concerns about the quality of these stocks, given their historical track records of weak execution and governance in the broader investment sector, including capital goods, defense, railways, real estate, and renewables.

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TIS Staff

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