Midcap and smallcap stocks see a rebound
Midcap and smallcap stocks are regaining some investor love, after getting battered because of the RussiaUkraine crisis.
The beaten stocks could be poised for significant rebounds if the crisis eases in the coming weeks. While the BSE smallcap and mid-cap indices fell by 4.51% and 3.73% year to date, they have clawed back some of the losses since March 17, gaining 1.84% and 1.19%.
G. Chokkalingam, founder and managing director of Equinomics Research and Advisory, expects FY23 to be a year for small and mid-cap stocks as new investors are entering the market every day despite corrections. Large-cap stocks remain impacted due to selling by foreign investors, while many small and mid-cap stocks have corrected 30-40% and offer value.
“The market is undergoing sectoral churn, and companies in niche emerging segments and sectors are gaining interest, resulting in their outperformance,” said Amnish Aggarwal, director of institutional equities, Prabhudas Lilladher.
Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, expects mid-caps to outperform in FY23. Considering 12-15% returns expected by the Nifty in FY23, the mid-cap index should also give more than 15% returns, he said. “Investors can look at the mid-caps selectively, taking cognizance of the quality. Certain mid-caps offer good opportunities, and the same has been visible in the consistent earnings growth reported by many. Many mid-cap IPOs had also been successful in 2022, reflecting the appetitive and interest of investors in the mid-caps,” he added. Mid- and small-cap stocks usually underperform large caps during tough times, analysts said. The recovery is equally fast, and small and midcaps tend to outperform as the rebound takes place, they added.
In an March 8 note to clients, analysts at Jefferies India Ltd said the current market volatility could create investment opportunities for the medium term. The Indian economy recovered faster during the pandemic versus initial expectations, they said, adding that India would have entered a period of economic upcycle, driven by an expected revival in government spending and housing construction, which could eventually drive a broadbased investment cycle. Historical analysis suggests that midcaps tend to outperform during phases of growth acceleration; thus, the recent correction could provide a good opportunity for investors to evaluate bottom-up stock ideas, the report said.
“The bottom-up approach is the right way, focusing on companies with strong visibility on growth, reasonable price to earnings ratio and strong cash flows,” added Agarwal of Prabhudas Lilladher.