In comparison, the NSE Midcap and NSE Smallcap indices have gone up 30.3 per cent and 34.2 per cent, respectively. The board-based mid- and small-cap indices have consistently outperformed the benchmark Nifty in the past three years.
Strong mutual fund (MF) buying has spurred the rally in mid- and small-cap stocks in recent years, say experts. MFs have invested nearly Rs 1.5 lakh crore since 2014.
“The superior performance of broader markets
in the recent past was due to strong institutional buying in these stocks compared to the blue-chip companies. However, one of key concerns is, the upward stock movement in a majority of the mid- and small-cap companies has happened in the absence of any recovery in the fundamentals of the companies,” said Arindam Chanda, head of broking, IIFL.
Analysts, however, point out that the earnings of broader markets
have remained stagnant leading to a sharp surge in the broader market valuations.
The Nifty is yet to surpass the valuations it commanded during the 2007-08 bull run. Currently, the one-year forward price-to-earnings (P/E) of the Nifty is 23.2 against the peak of 26 in 2008. On the other hand, the valuations of broader markets have already registered new highs with the NSE Midcap index currently trading at 33.4 times one-year forward P/E.
Going forward, analysts predict the large-cap stocks to do better than the broader markets as the earnings recovery in the Nifty universe is anticipated to be better than the mid- and small-cap indices.
Further, experts say while the bigger companies are well prepared for the goods and services tax (GST), smaller players could feel the heat of its implementation on their balance sheets.
“In the current scenario, large-cap stocks are looking better than the mid- and small- cap stocks. While the GST would disrupt the earnings of blue-chip stocks for one or two quarters, some of the smaller companies could feel the heat for longer. Further, the valuations in the broader markets also looks stretched,” said G Chokkalingam, founder, Equinomics Research & Advisory.
Another key concern in the broader markets is liquidity. With the institutional flows chasing the space, shares of many smaller companies have rallied significantly. However, any redemption in mutual funds could trigger a major fall in the mid- and small-cap indices.
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