2020 was the year of change or a reset for many but it turned out to be a fabulous year for equity investors with benchmark indices rallying by about 15 percent each but the big surprise came from the small & midcaps space.
The S&P BSE Sensex and Nifty50 rallied by about 15 percent each compared to about 20 percent rally seen in the S&P BSE Midcap index, and more than 32 percent jump in the S&P BSE Smallcap index in 2020.
Small & midcaps underperformed benchmark indices in the last 2 years but 2020 revived investors’ appetite for broader market equities. Abundance liquidity proved to be the biggest driver of the rally seen in the year 2020.
The outbreak of COVID forced many central bankers to adopt loose monetary policy and provide stimulus to boost growth. Foreign institutional investors poured in more than Rs 1 lakh cr in Indian equity markets in the year gone by.
Thanks to the abundance liquidity, green shoots in the economy and revival in earnings, investors started chasing growth largely in untapped small & midcaps.
The recent momentum seen in the small & midcap space has pushed more than 90 percent of the respective indices above their 50 & 200-Days Moving Average which confirms robust momentum in these stocks.
Most of the stocks could well be considered in the large-cap segment given the recent rise seen in the M-cap but they are still part of the broader market indices. The recent euphoria in these stocks does suggest that money is chasing growth and will continue to do in 2021 but chances of some consolidation cannot be ruled out.
In terms of technical parameters, stocks that are trading well above their short-term and long-term moving averages i.e. 50-DMA, and 200-DMA are considered to be in an uptrend.
There are more than 90 stocks in the S&P BSE Midcap index that are trading above their 50 & 200 DMA include names like Berger Paints, L&T Infotech, Info Edge, Adani Enterprises, Biocon, IGL, Biocon, and Muthoot Finance, etc.
There are more than 600 stocks in the S&P BSE Smallcap index that are trading above their 50 & 200-DMA. These include Adani Gas, Tata Communication, MindTree, Varun Beverages, Ipca Laboratories, and Trent.
Note: The above table is for reference and not buy or sell ideas
Experts are of the view that the underperformers could soon turn out to be a dark horse in 2021 as well. Investors should look for top-quality mid & small-cap stocks for the portfolio.
“Mid and small caps have underperformed large caps in the last couple of years and that trend is expected to reverse. In a low-interest rate environment, small and mid-cap companies stand to benefit the most,” S Naren, ED & CIO, ICICI Prudential Mutual Fund told Moneycontrol in an interview published earlier in January.
“In the quarters ahead, it is very likely that the profitability of fundamentally strong companies in the broader markets is likely to improve, and soon enough the same will be reflected in the stock price as well,” he said.
Naren further added that if an investor is ready to stay put for the next five years, one can consider investing into broader markets, but through the SIP route.
The other big factor which supports Midcap stocks is the valuations which still remain attractive at current levels. Large caps were the first ones to react to the faster-than-expected economic recovery, and a large part of the small and mid-caps were left untouched – the catch-up is happening now, suggest experts.
In CY20, Nifty midcap rose 22 percent compared to the Nifty’s rise of 15 percent. “Over the last five years, mid-caps have underperformed by 20%. The Nifty Mid-cap100 P/E ratio now trades at a 16% premium to large-caps at 24.7x (v/s 11.9x in Mar’20,” Motilal Oswal said in a report.
Analysts are bullish on the prospects of equities and most of them believe mid and small-caps will outperform the large-caps in 2021.About 80 percent of the respondents of the Moneycontrol poll conducted in the last week of December highlighted mid and small-caps will outperform in 2021.
The risk appetite of investors is high and analysts believe equities will outshine gold in 2021. About 73 percent of the respondents think gold will underperform equity in the year.
“The broader market indices would focus on the third-quarter results and commentary from the management for the next year,” Rajeev Srivastava, Chief Business Officer at Reliance Securities told Moneycontrol.
“We are maintaining a positive bias on midcaps and small caps since the start of the last quarter post opening of the economy from the lockdown and we believe it will outperform the large caps. Valuations are catching up the larger trends sectors and will improve further,” he said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.