After a dismal performance in 2018, the year 2019 is expected to be a good year on hopes of earnings revival and rally in select stocks
The broader markets are heading to close 2018 on a disappointing note after a stellar run in 2017. The year started on a strong note with midcap and smallcap indices hitting record highs in January but the correction in subsequent months stunted their growth trajectory.
Experts feel the key reason was the high valuations after a stupendous run in 2017.
The BSE Midcap index fell 15 percent (versus 48 percent rally in 2017) and smallcap plunged nearly 25 percent (versus 60 percent upside) while the 30-share BSE Sensex gained 5.6 percent upside (against 28 percent upside).
"Despite such huge corrections, midcaps are still relatively overvalued with respect to largecaps due to overly optimistic earnings projections," said Vinay Khattar, Head of Research at Edelweiss Broking.
He further said earnings growth hasn't matched the nominal GDP growth as well as the growth in valuation multiples for the past few years, in both Nifty and the broader market. "Such a mismatch has led to overvaluations in the Indian equity markets."
Although the midcap and smallcap indices fell, some stocks stood out.
Among midcaps, top 10 stocks gained 20-62% this year. L&T Infotech rose the most (up 62 percent). Other stocks include Divis Labs, Havells India, Biocon, Colgate Palmolive and Adani Power.
But the returns in the broader market, on the whole, were muted with nearly three-fourth of the midcap index stocks slipping into the red.
The performance by smallcaps was worse than midcaps, but some stocks bucked the trend.
Three out of top 10 stocks turned multibaggers and the rest rallied more than 60 percent. Excel Industries, Merck and IOL Chemicals & Pharmaceuticals gave more than 100% returns, while the rest seven stocks, including NIIT Technologies, HEG, Vinati Organics and Nelco, rose 67-90%.
After a dismal performance in 2018, the year 2019 is expected to be a good year on hopes of earnings revival and rally in select stocks due to huge spending in election year, experts said, adding the new low in market breadth is also indicating improvement, going ahead.
"Market breadth, one of the components of our sentiment indicator, has come close to a new all-time low. An upturn is in the offing, which means the broader market's relative performance to the narrow indices will likely improve in 2019," said Ridham Desai, Equity Strategist at Morgan Stanley.
Hence, after this correction, there are multiple opportunities in the broader space, but one should stick to quality stocks, experts said.
"Opportunities are umpteen across the broad market and mid-and-small cap space after severe market correction. But, the stock selection is critical," Jagannadham Thunuguntla, Senior VP and Head of Research (Wealth), Centrum Broking, told Moneycontrol.