Mid and smallcap correction seems to be far from over and will take at least 1-2 years to outperform large caps, say analysts
Although valuations appear attractive in the ongoing sell-off season, stock market analysts believe it may take some more time for midcap and smallcap stocks to start performing even as the current market volatility offers great opportunity to accumulate these stocks.
Harendar Kumar, managing director – institutional equities, Elara Capital, said, "We are reaching closer to the bottom for mid and small caps. Currently, the mutual fund industry is heavily consolidated towards large caps. If economy revives, money will flow into mid and small caps, which will help the valuation to be competitive."
According to him, while the valuations are not too expensive at the moment, the competitive valuation will make it easier to take a call on investments in mid and small-cap stocks.
"I'm very optimistic and I believe they will outperform large caps and will give better returns. This is a good level to accumulate but one needs to take a three-year view," he said.
In the past one year, the BSE MidCap index declined over 20%, while BSE SmallCap index slumped 27%. Since January 1, the midcap index corrected over 13% and since July 5, the day Union Budget 2019 was presented, it has fallen nearly 10%. The smallcap index, too, corrected nearly 16% since January 1, and 12% since July 5. Overall, both the indices have underperformed the benchmark Sensex.
According to Pratik Oswal, head of passive funds, Motilal Oswal AMC, midcaps and smallcaps are available at good valuations, and it is a right time to accumulate but with a longer time horizon.
"The price at which some of these stocks are available now was not seen three years ago," Oswal said.
However, not everyone is of the opinion that mid and smallcaps have corrected enough.
According to an analyst, the mid and smallcap correction seems to be far from over.
"The valuations of some of these stocks are still high and we can expect some more correction. While it is time to accumulate, I think it will take at least 1-2 years before they start outperforming the large caps," the analyst said.
Siddharth Sedani, VP – equity advisory, Anath Rathi Shares and Stock Brokers, said, "Midcap and smallcap are actually in a bear market and not performing at all, except for a very few selected stocks. Expecting any firework from them will not be justified. The second half of this fiscal it may start showing some signs of revival."
A K Prabhakar, however, feels quality midcaps should start performing in the next 10-15 days.
"I hold a different view, and I think it is a matter of a few days that quality midcaps will bounce back. Though the midcap index is underperforming, quality midcaps are not showing weakness. There have been 9-10 months of correction, and I think they will bounce back very soon. Smallcaps, on the other hand, will see more correction," Prabhakar
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According to him, while the valuations are not too expensive at the moment, the competitive valuation will make it easier to take a call on investments in mid and small-cap stocks.
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