Time to Buy Mid and Small Caps?

4 min read
Time to Buy Mid and Small Caps?

The S&P BSE Sensex has scaled fresh record highs but the question is Where to invest now? we’ve got three options

  1. Wait for market corrections and then invest.
  2. Buy currently available value stocks.
  3. Explore and Identify Market Opportunities.

Let’s talk about the 3rd option.

As per our risk profile, we select either LargeCaps, MidCaps or SmallCaps stocks. so let’s explore all there and then find out the available opportunities to invest.

  1. S&P BSE LargeCap Index

2. S&P BSE Midcap Index

3. S&P BSE SmallCap Index

Concentrate on charts and you will find that the S&P BSE Smallcap index is down by about 34% from its record high of 20,183 registered on 15 January 2018 while the S&P BSE Midcap index witnessed a fall of little over 19% from the high of 18,321.

When people talk about the stock markets making new highs, they are not talking about the stock market. More often than not, they’re referring to the 30 or 50 stocks that serve as a benchmark to help people make sense of what’s happening. Nifty 50 and Sensex 30 are at best a representation of what’s happening in the broader market. It’s not the absolute truth. There are about 7,000+ publicly listed companies that don’t factor here.

Just 15 stocks have accounted for almost all the $51 billion climbs in India’s stock market this year. Now the smaller fry might be about to join the party. (Source: Bloomberg)

Experts feel that market valuation look stretched and the smart money would now chase stocks which have been beaten down but still offer growth potential as the tide reverses or in other words earnings show signs of recovery which could possibly take another two quarters.

There are five positive indicators for growth

  1. Reduction in the corporate tax rate.
  2. An overhaul of controversial labor laws.
  3. Proposed divestment of large public sector units.
  4. A possible resolution of the US-China trade impasse.
  5. Relaxation of foreign investor rules.

So the impact of corporate tax cut can only be seen in upcoming quarters.

Here are the top beneficiaries of this tax cut.

Source: LiveMint

India's GDP growth was dipped to 5% for Q1, could go even lower for the September quarter, fear experts as both investment demand and consumption demand are low amid sluggish economic activity.

Valuation discount of mid-caps versus large caps is close to 10-year highs, highlighting the improved risk-reward and low expectations. In two years, mid-cap sentiment seems to have gone from extreme optimism to huge pessimism.

“Somewhere here the bottom is being formed. We have given a call to our clients to start accumulating small and mid-caps,” — Nilesh Shah, chief executive officer at Kotak Asset Management Co., who helps oversee $25 billion in assets. “”

With borrowing costs tumbling thanks to Reserve Bank of India’s interest-rate cuts — and more such reductions anticipated — the cheaper valuations of stocks that have been laggards during India’s rally may lure buyers.

The valuation of the Nifty MidCap 100 Index is near the cheapest since 2012 relative to the benchmark NSE Nifty 50 Index, suggesting a potential for a rebound.

Only 2% of small caps have become large caps over the past 10 years, while 20% either have ceased to exist or are no longer listed. The odds are a bit better for mid-caps, with 15% able to elevate to large-cap territory, but on the other hand, almost two-thirds were downgraded to small caps.

Technical Analysis: Let’s analyse NIFTY MidSmallcap 400 Index.

The NIFTY MidSmallcap 400 Index is designed to reflect the behaviour and performance of the mid and small market capitalisation companies.

Source: https://upstox.com/open-demat-account/?f=HANP
What is the Golden Cross: The golden cross is a technical chart pattern indicating the potential for a major rally. The golden cross appears on a chart when a stock’s short-term moving average crosses above its long-term moving average. The golden cross can be contrasted with a death cross indicating a bearish price movement. (Investopedia)

Well, the worst may now be over in terms of economy, and we could possibly see another quarter or two of poor economic data which would give long term investors another chance to possibly enter markets on dips.

Small and Midcaps tend to do well when GDP growth surprises and we will possibly see GDP recovery going forward. As the recovery gets a bit broad-based, we will definitely see midcaps outperforming the large caps over the next couple of years.

If you’d like to add something then write to me at akshay.equity@gmail.com

Akshay Seth

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