Mid- and small-cap indices hit fresh record highs on Wednesday, widening their lead over large cap stocks this year.
The benchmark Nifty 50 has given returns of 8.3 per cent in the year-to-date. In comparison, Nifty Midcap 100 and Nifty Smallcap 100 have gained 28 per cent and 30 per cent, respectively.
Markets have witnessed broad-basing over the last nine months, with mid- and small-caps seeing a jump in their market cap contributions since the previous Nifty 50 peak of December 2022.
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“Markets have undergone a transformation from quality to value, and from secular sectors to commodities with different sectors being the flavour of the month in CY22. From being entirely dominated by a narrow basket of quality large cap stocks of select sectors, markets have broadened with the participation of other sectors too during the last eight months,” a recent note by brokerage Motilal Oswal Financial Services said.
Nifty 50 (19.6x) and Nifty Mid-cap (23.7x) indices were trading at a premium, while the Nifty Small-cap 100 index (15.2x) was trading at a discount to the LPA on a 12-month forward P/E basis.
Rich valuation
“We believe that the valuation of mid- and small-caps remains appealing when compared to the trends of the past seven years. Specifically, small-caps appear to be even more attractive than mid-caps in the current scenario,” said Vinod Nair, Head of Research at Geojit Financial Services.
Nair, however, believes it’s not an ideal environment for investing in high-risk categories considering the overall market consolidation. “Our view is that India is now more of a stock to sector play. Although there has been strong performance in the short term by mid and small-caps, sustaining this in the near term may pose a challenge.”
Consistent inflows In mid and small cap funds have indirectly helped the cause of such stocks and can help protect downside in the coming months.
“I am a bit nervous as these stocks have rallied 3-4 times over large caps since April and the valuation comfort is no longer there. Even a 0.5 per cent correction in the market will lead to swift and sharp fall in these names,” said G Chokkalingam, Founder, Equinomics Research & Advisory.
Weak monsoon, stronger dollar and high global crude oil prices are some of the headwinds for Indian equities. Crude oill prices have surged on the back of Saudi Arabia extending its 1 million barrels per day cut until the end of CY23.
Among the positives, the possibility of a September rate hike by the US Federal Reserve has reduced after last week’s softer than expected US August payrolls report. Despite India’s services purchasing managers’ index falling from 62.3 in July to 60.1 in August, the seasonally adjusted S&P Global India Services PMI Business Activity Index indicated one of the strongest increases in output seen since mid-2010.