In March 2023, when Nifty started to recover, the mid and smallcap indices were still under selling pressure. But in April, when the headline index gained 4%, the midcap index advanced over 5% while smallcaps gained 7%.
June turned out to be the best month for the midcap index as it leaped over 6% while July was the best for smallcap when it advanced nearly 8%.
Backed strongly by Dalal Street’s growing army of retail investors, the rally in the broader market despite some hiccups in the frontline index is backed by a strong corporate earnings outlook and years of underperformance.
As far as valuations are concerned, PE multiples are not anywhere closer to their historical high in both mid and smallcaps, shows data from ASK Private Wealth.
“There is no compelling reason now to sell SMID (small and mid-cap) portfolios as the latter have better growth prospects and similar valuations to largecap companies. However, investors should be aware of the risks and mitigate them by diversifying their SMID portfolios,” the wealth management firm said, adding that from an earnings-valuation perspective, post-Covid index expansion is still lagging earnings for SMID compared to largecaps.
Analysts see pockets of froth in smaller stocks but not near the exuberance phase seen in 2018 or 2021.
“Smart money is still looking at mid and smallcap space especially among the domestic institutional investors. This space is looking decent despite near-term strong returns. Intermediate price corrections will come which may be in the 12-15% range, but with a 3-to-5-year view, smart money will participate more in this space,” said Sheetal Malpani of Tamohara Investments.
Despite the recent run-up, investors say there are enough opportunities for bottom-up stock picking, especially if you are building a portfolio for the next 3-5 years.
Varun Goel of Nippon India MF, sees enough opportunities in sectors like IT, pharma and media.
Media stocks are looking attractive because of the advertisement opportunity ahead of the election season. “In pharma, domestic formulation space continues to be an evergreen opportunity. And we continue to incrementally like some of the US generic-based opportunities also. Midcap IT stocks remain attractive selectively,” Goel said.
(Data inputs: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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