Mid and smallcap stocks have shown signs of recovery, with the BSE Midcap and BSE smallcap indices rising 5.8% and 7.7%, respectively, since March 28. Analysts attribute the recent run-up to moderation in commodity prices, attractive valuations, and expected improvements in earnings.
In the past few months, the bulk of the mutual fund flows came to mid and smallcap funds, which, in turn, made its way to these stocks. Smallcap funds, for instance, added 3 million folios in FY23, with the AUM rising to Rs 1.33 trillion.
Also read: Where is share market headed after Nifty closes above 17620, Bank Nifty below 42150; check support, resistance
“Small and midcap companies are facing competition from larger companies. There is consolidation happening across sectors and large companies are becoming larger. Working capital is not easily available and the rate of interest which these companies have to pay is on the higher side. Growth triggers are limited at the moment,” said Deepak Jasani, head of retail research, HDFC Securities.
Experts attribute the recent rise in such stocks partly to Q4 results.
Smart traders are using this time to exit positions while retail investors are getting in. Based on individual company’s results, analysts expect stock prices to move wildly in either direction until late next month.
“The sharp fall in broader markets have opened up avenues to generate alpha over the market returns through investing in the less-obvious names. We will continue to focus on profit-making companies, where there is a visibly decent profit growth, and where what we pay today will be more than made up by way of future profitability,” said Sunil Singhania, founder, Abakkus Asset Manager.
e is being appreciated and that should mean that the Indian economy will be the fastest-growing large economy for the next few years.
up owing to government focus on ‘Make in India’; and the attractive productivity-linked incentive scheme (PLI) is leading to capex for capacity additions. China + 1 has meant that it is not just IT+ pharma, but new sectors like chemicals, textiles, garments, consumer goods, etc have seen a pick-up in exports. With a pragmatic and focused government in place, we can expect this momentum to continue,” Singhania said.
Jasani believes that while interest rates seem to have peaked out, there may not be a runaway rally in mid and smallcap stocks across the board in near future. The movement will mostly be stock specific. A broader rally will happen only if interest rates fall and if investors who have made money in largecap stocks turn their attention to mid and smallcap names.
Also read: Supreme Court tax ruling may add to litigation
“This is the space where alpha is generated but the number of companies which are competitive and have good governance practices is few, and the investible universe is becoming narrower and narrower,” said Jasani.
Another headwind he cautions about is El Nino, which could spur inflation and curtail the spending power.