Recent data suggests that the froth seen in the broader market has come down and the valuations are ripe for selective stock picking
Nifty50 might have reclaimed 11,000 for the first time since February, but majority of the action was seen in the small & midcaps. Nifty made a low of 10,585 on February 19 before it started moving higher to reclaim 11K.
The index has rallied about 450 points, or 4.2 percent, since February 19. Nearly 50 percent of the stocks in the Nifty500 index rose 10-100 percent in the same period.
The Nifty has significantly outperformed the midcap index since Dec 2017, but things are changing in favour of the broader market after recent correction, feel experts.
Ahead of crucial elections, it looks like small & midcaps are getting attention. The bounce back in the market was led by a handful of Nifty50 names but the big trend was seen in the broader market which saw double-digit returns.
As many as 242 stocks in the Nifty 500 index have risen 10-100 percent since February 19. These include Sun TV, GSPL, Mahindra CIE, Bajaj Finserv, Tata Steel, Cochin Shipyard, Bank of India, Bank of Baroda, JustDial, Voltas, UCO Bank, ACC, Vedanta and Tata Motors.
Table: 20 stocks with highest returns from the list of 242
The relentless underperformance of midcaps can largely be attributed to macro headwinds, concerns about governance/liquidity issues, and the lack of pick-up in earnings growth.
“Over last one year, a lot of midcaps corrected and are now available at a reasonable price and provide good entry opportunity. Given the environment is very dynamic and mid-cap companies require far more research than large-cap peers, it is best managed by professionals,” Meenakshi Dawar, Fund Manager, Reliance Mutual Fund told Moneycontrol.
“A part of investment can go into mid-cap funds, but the investment horizon should be long, and one should maintain discipline while investing,” she said.
Valuations
The battle between the mid and largecap as to which theme is more suitable for investing is not new. Recent data suggests that the froth seen in the broader market has come down and the valuations are ripe for selective stock picking.
The chart below highlights the relative performance of midcaps and largecaps. The midcaps underperformed largecaps during 2006-2014 period.
“The Mid-cap outperformance accelerated in 2016 and 2017, and since 2018 to now, mid-cap performance has reverted back in line with largecaps, as midcaps have surrendered their outperformance to largecaps, at the index level,” Sanctum Wealth Management said in a note.
“Valuations for mid-caps have dropped to in line with large caps. However, bottom-up efforts to identify attractively valued mid and small caps continue to turn up only limited alternatives,” it said.
Midcaps had a stellar run in CY17. Notably, the Nifty mid-and small-cap indices delivered 47 percent and 57 percent returns compared to the Nifty’s 29 percent return in that year.
As a consequence, the P/E valuation premium of mid v/s largecaps reached 46 percent in March 2018. However, after the correction in midcaps, the P/E premium now stands at just 10 percent, Motilal Oswal highlighted in a report.
“The presence of several loss-making PSU banks in the mid-cap index makes the P/E-based valuation comparison slightly distortionary, in our view. From P/B based valuation perspective, the midcap index has corrected significantly from a peak of 3x in Aug’18 to 2.3x, while the Nifty trades at a P/B of 2.6x,” it said.
“We believe that the broad underperformance of midcaps is overdone and interesting bottom-up opportunities are now available in this space across sectors,” added the report.
