BSE MidCap, SmallCap indices brave headwinds, put up strong show in April

From April 2023 till date, the BSE MidCap index dropped only in October and December 2023, while the BSE SmallCap index fell in October 2023, February 2024, and March 2024, otherwise staying positive.

India's BSE MidCap and SmallCap indices continued to outperform in April, attracting investor attention, despite simmering geopolitical crisis over the Israel-Iran conflict and soaring crude oil and commodity prices.

In April so far, the BSE MidCap index rose 5.7 percent, its highest since December 2023, while the BSE SmallCap Index surged over 9.7 percent, marking its biggest jump since February 2021. From April 2023 till date, the BSE MidCap index dropped only in October and December 2023, while the BSE SmallCap index fell in October 2023, February 2024, and March 2024, otherwise staying positive.

Since April 2023, both the broader indices surged nearly 75 percent each, but the benchmark Sensex and Nifty experienced significant volatility in April, remaining relatively flat with gains of just 0.11 percent and 0.44 percent.

Analysts said that after a prolonged rally, the Indian markets, especially midcap and smallcap spaces, saw profit-booking in February and March following regulatory warnings, leading to corrections. Both the segments have now reached fair values after correction. In the last couple of months (February-March 2024), 63 percent of midcap and 70 percent of smallcap universe witnessed negative returns. Around 24 percent small-cap stocks fell more than 15 percent. In a stark contrast, two-thirds of the largecap universe delivered positive returns in the same period.

With the onset of the new financial year and the ongoing general elections, investors are cautious, anticipating stability amid global and domestic uncertainties. The ruling party's confidence in securing higher seats in the elections boosts market sentiment. Investors are focusing on quality midcap and smallcap stocks, particularly those aligned with the government-promoted sectors like the railways, defence, construction, rural development, and solar panels, analysts said.

The BJP's 2024 manifesto, led by Prime Minister Narendra Modi, stresses on policy continuity, improved execution, and expanding existing priorities like housing, Ayushman Bharat, and infrastructure. It also includes significant political initiatives such as the Uniform Civil Code, Citizenship Amendment Act implementation, and One Nation, One Election. The manifesto aims for broad-based development through government programmes with socio-economic impacts, focusing on infrastructure development, manufacturing, and capital expenditure.

Rajesh Palviya, head of technical research at Axis Securities, said despite the Sensex and the Nifty hovering near record highs, there's no supply pressure, and most earnings reports meet or exceed expectations, instilling further confidence. Positive sentiments and bullish expectations for near-term events are driving buyers in the broader markets. Many investors, having adjusted taxes in March, are now reinvesting in short to medium-term prospects. As long as the Nifty holds above the 22,000 mark, the rally in midcaps and smallcaps is expected to persist, potentially leading to new record highs for the Nifty and the Sensex and further increasing interest in mid and smallcaps.

Indian markets stayed volatile in April due to geopolitical tensions and higher crude oil prices. Fresh US inflation data reinforced the Federal Reserve's message of sustained high interest rates. The Fed's preferred measure of underlying inflation rose 0.3 percent in March and 2.8 percent from a year earlier. This, along with strong US economic indicators, suggests a delay in anticipated interest rate cuts, with concerns growing that there may be none in 2024.

The amendment to the India-Mauritius tax treaty also raised concerns about overseas flows. Globally, attention is on the upcoming Federal Open Market Committee meeting, where experts expect no change in the Fed funds rate but focus on Fed chair Jerome Powell's commentary.

Kranthi Bathini, director of equity strategy at WealthMills Securities, said that in bullish markets, size matters greatly. Historically, mid and small-cap stocks tend to outperform large-caps due to their market cap size. With the Indian economy surging, new themes are emerging, driving the performance of mid and small-caps. Strong liquidity flows are fueling these segments in the medium to short term. However, investors must consider factors like company quality and earnings visibility before investing. Additionally, mid and small-cap stocks often have limited free floats, making them susceptible to price rises with even small liquidity injections.

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