Mid, small-cap rally to continue even as indices hit new high

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Mid- and small-cap stocks continue to find favour with investors, with the S&P BSE MidCap and S&P BSE SmallCap indices hitting a fresh high on Thursday. So far in calendar year 2017 (CY17), both these indices have rallied around 31.5 per cent and 36 per cent, respectively, compared with a 19 per cent gain in the frontline S&P BSE Sensex.
Since their respective lows in August, while the S&P BSE SmallCap Index has recovered nine per cent, the mid-cap index gained 7.5 per cent till Thursday. When compared to the broader market, the Sensex gained 1.4 per cent.

The surge, say analysts, comes on the back of strong liquidity flows into the equity market, especially by mutual funds, to the tune of Rs 71,295 crore in CY17. Their investment so far in CY17 is 5.9 times higher than that of CY16, when they had invested Rs 12,136 crore.

“The large-caps seem to have topped out. The recent market correction saw a healthy downtick in good mid- and small-cap names from their peak valuation. Hence, there is value-buying emerging in them. That apart, despite foreign investors remaining on the sidelines, domestic liquidity has been supportive that got deployed in the mid- and small-cap segments,” Kunj Bansal, ED & CIO at Centrum Wealth Management, said.

Fuelled by this rally, more than one-third, or 308 of the 845 stocks from the mid- and small-cap indices have outperformed the market by gaining over 35 per cent in the first eight months of 2017. Of these, 82 companies, mainly from finance (including housing finance), real estate, infrastructure, retail, chemicals and steel sectors, have seen their market value more than double.

Given the rally, investors need to tone down their market return expectations for the remaining part of the year, analysts say. While stock-specific actions will continue, the road ahead for the markets will depend on how the geopolitical situation plays out, outlook for interest rates by global central banks and corporate earnings back home.
“The next domestic trigger for the markets will be the September quarter results of India Inc that will start trickling in from October. The markets and stocks will react based on the performance, especially after the implementation of the goods and services tax,” Bansal said.

A K Prabhakar, head of research at IDBI Capital, expected the rally in mid- and small-cap segments to continue as he believed there is value in these two segments. A number of stocks, he said, have been beaten down unnecessarily following the Securities and Exchange Board of India’s order on shell firms. Liquidity, too, was an important factor.

“While more such orders are awaited and are good for the clean-up of the system, investors have understood that these orders will not impact the quality companies that comply with regulations. I prefer companies where listed firms in the mid- and small-cap space are taking away market share from the unorganised sector, especially in the consumption space,” Prabhakar said.


Ridham Desai and Sheela Rathi of Morgan Stanley, too, believe the consumption theme would remain relevant in playing the India story over the medium-term. “As cities expand and grow, and the population progresses and prospers, tracking the consumption economy will become more and more important,” they said in a September 4 report they co-authored.

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