According to a study by ICICI Prudential Mutual Fund, the share of mid- and small-cap stocks to the country’s total market capitalisation was at 36.3% in May, compared to 25% in Dec 2020 and 19.6% in Dec 2013. Meanwhile, the contribution of the large caps declined to 63.7% in May, compared to 74.2% in December 2020 and 80.3% in December 2013.
ETMarkets.com“We are observing excessive valuations in this segment, which raises concerns about potential returns relative to the risks involved,” says Anish Tawakley, co-CIO equity, ICICI Prudential AMC. “We believe the current risk-return trade-off in the small- and mid-cap space is not attractive.”
Mid-caps and small-caps have outperformed their large-cap counterparts in the past three years. While the Nifty rose 26.34% and 15.82% over one- and three-year periods, the Nifty Midcap 150 has returned 57.46% and 28.05%, respectively. The Nifty Smallcap 250 rose 61.72% and 27.33%, respectively.
“In past 12 months, small- and mid-cap stocks have led Indian markets, with valuation-led gains surpassing earnings-led gains,” says Krishna Sanghavi, CIO – equities at Mahindra Manulife MF. Large-cap valuations are more favorable, he said.
The outperformance has resulted in valuations of small-cap and mid-cap stocks shooting past their long-term averages.