Mid-cap, small-cap stocks lose steam after stellar run
MUMBAI: After a marathon run that lasted from 2014 till late 2017, mid- and small-cap stocks seem to have run out of breath.
Thanks to expensive valuations and quality concerns, these stocks have underperformed BSE’s benchmark 30-share Sensex in the year so far, as investors locked in gains before the expected turbulence of next year’s general election.
The BSE mid-cap index and BSE small-cap index are down 12.84% and 15.66% respectively, in the year so far, while the Sensex itself is up 2.49%.
The uninspiring show is in sharp contrast to 2017, when mid- and small-cap indices logged 48.13% and 59.64% gains respectively, while the Sensex clocked a more mellow 27.91% gain.
These stocks have performed especially badly in May as well the three sessions so far in June.
“Some of this is giving back the stellar returns of last year,” said Ridham Desai, India equity strategist at Morgan Stanley.
“What happens is once you get a breakdown in prices, then you get a vicious turn in liquidity, and so the liquidity, which I would define as the force on the bids has abated,” said Desai.
“I think it will take a little while (to trough out) and we will probably not get a V-shaped recovery,” he added.
UBS’s India securities arm also voiced its concerns on the pack, noting investor interest may have peaked for now.
“The economic growth cycle is less strong now than in historical tightening periods, and this is reflected in earnings cuts. The rise in interest rates is not counter-cyclical,” UBS Securities India Pvt. Ltd said in a note on Monday.
“SMIDS (small and mid caps) have started underperforming with rising interest rates recently. We expect this to remain an overhang; our UBS economist forecasts a 50bps (basis points) repo rate hike in FY19,” they added.
One basis point is a hundredth of a percentage point.
“The best of local retail flows supporting SMID outperformance may be behind us, at least cyclically. Local flows follow returns, not the other way around,” they said, adding UBS isunderweightsmall-and mid-cap stocks as an asset class in its portfolio positioning recommendation.
From the record highs posted by BSE mid-cap index and smallcap index respectively on January 9 and January 15, around three and 85 stocks in the respective indices have eroded at least half of their value.