Nifty99000 100%

Sensex99000 100%


Deja Vu: It’s back to 2014 for midcap and smallcap stocks

Author: Kumar Shankar Roy/Wednesday, March 13, 2019/Categories: Exclusive

Rate this article:
Deja Vu: It’s back to 2014 for midcap and smallcap stocks

Dates for this year’s biggest event, Lok Sabha elections, have been announced. It’s 2014 again for many political pundits. In a stroke of sheer luck, midcap and smallcap stocks are also poised at 2014 lows, from where they staged a huge comeback as Narendra Modi-led BJP won the historic mandate five years ago. Early signs of a revival for smallcaps and midcaps were seen two months ago and our cover story dated January 16 ‘Is It Time To Again Buy Small, Midcap Stocks?’ shed light on the trend. Since then, midcap and smallcap stocks have got an increasing share of the spotlight, as largecap stocks lost steam. In the last one month alone, mid and smallcap indices have gained between 2 and 5 per cent even as the Sensex fell 1 per cent. Over 150 stocks in smallcap index rose 10-40 per cent in the four-day period ended March 8, indicating a full-blown re-rating. Read on to know more.

2014 was not an ordinary year. Markets regained their form that year after the elections ushered a new government with a decisive mandate. Five years down the line, things seem to have changed little. The relative valuation of midcaps versus largecaps is at a historically low level. The 7-day moving average is at 2014 levels. Also, the rolling 1-year return difference between midcap and largecaps are at a historical extreme of minus 22 per cent compared to an average of 4.4 per cent. All these stats indicate that valuations are compelling at these levels for a revival in the performance of midcaps. This may be especially true for high-quality midcaps which have taken quite a beating and are good bets for anybody investing for the long-term. Smallcaps are a bigger universe, and it is important that investors really do a lot of research before betting big on a stock. 

For a full-blow re-rating of midcap and smallcaps, all that is needed now are solid earnings. In 2014, it was about new hope. In 2019, it is about execution. Thanks to an expected normal monsoon, expect benign input prices (including crude oil and commodities), a solid consumption outlook is expected to lead to earnings recovery in FY’20. The pick-up in earnings should help midcaps. The Nifty has so far significantly outperformed the midcap index since December 2017. This staid underperformance of midcaps can largely be attributed to unsustainable valuation premium to largecaps, macro headwinds and liquidity issues.

If you look at just data, there are definitely encouraging signals. As per historical data, the peak-to-bottom correction trends suggest midcap correction is over. According to numbers, over the last 12-13 years, the correction in midcaps from the peak to the bottom has been much higher relative to largecaps. This is because midcaps (and smallcaps) are more volatile compared to largecaps. Now, with hitherto struggling midcaps starting to do well, things are expected to change for the better. Certain sectors have badly hit midcaps as a group. For example, the unusual and lingering drag from the PSU banks on the midcap index would soon be a thing of the past, as the government lenders are nursed back to health. Another sector that is expected to do well is metals and mining, who have previously dragged down midcaps.

The last two weeks have seen mid and smallcaps rally. If the tide has turned in favour of small and midcaps, there are a set of people/investors who can benefit handsomely. The pace of turnaround is not surprising as the previous one year saw small and midcap stocks getting beaten down badly. Many had completely written them off. But, they are rising like a phoenix. Of course in the near term, the market direction will be a function of the general elections and the consequent political outcome. Until then, it will be an era of high volatility. 

Retail investors wanting to play the midcap and smallcap themes should adopt a safety first strategy. Here is what you do. Firstly, only invest in those midcap and smallcap stocks that have a daily trading turnover of $1 million. This will ensure you are not stuck in illiquid stocks. Secondly, go for quality stocks than small unknown and untested companies. Three, it is better to take the mutual fund and ULIP way when it comes to directly investing in midcap and smallcaps. Do SIP in funds with at least 5-7 year track record. The SIP investment period should be for at least 10 years so that you can gain the full cycle benefits.  

The author is a financial journalist with 14 years of experience  


Number of views (762)/Comments (0)

Leave a comment

Add comment



Ask the Finapolis.

I'm not a robot
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above



The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free