Frothy valuations and liquidity risks in the small and midcap funds led to a massive selloff in the markets in March. However, Emkay Global sees the correction as an opportunity to enter the market and reiterates its preference for small and midcap stocks.
Despite the selloff, which was deemed temporary by analysts, the Nifty 50 managed to gain half a percentage during the month. At the same time, the S&P BSE Mid Cap index lost over 1.4 percent and the S&P BSE Small Cap index 5.4 percent. During the corrective phase in March, energy, real estate, and materials turned out to be key underperformers, Emkay Global said.
The brokerage house says the correction is an opportunity to enter the market with a six-to-12-month perspective. It predicts a rebound in the market in three-six months, when smallcaps and midcaps would start to outperform again and the 'hide in large-caps' trend would ebb out.
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Emkay has identified multiple triggers that would drive the rebound. These include an expected victory of the National Democratic Alliance (NDA) in the upcoming parliamentary elections, the first reform-oriented budget of the new government in its third straight term, and monetary easing by the US Federal Reserve and the Reserve Bank of India (RBI) in July. "We see this as a 'buy-the-dip' correction, with the only caveat being to avoid SMID (small and midcap) stocks with elevated valuations," it said.
As we advance, a strong earnings forecast, macroeconomic stability with slight concern in the inflation trajectory, and monetary easing in Q2FY25 could help the market bounce back, Emkay said.
Emkay has identified that the incremental profit pool is shifting away from sectors like banks, FMCG and IT, which dominate the large-cap universe to manufacturing sectors, dominated by small and midcaps. "This trend should continue to be the focus of the government's policy and incremental growth is unlikely to change soon," it said.
Also Read | Meltdown in broader market as midcaps, smallcaps burn amid heavy selling
Rallies in the small and midcap segments are inevitable while also being volatile and offering frothy valuations. The segment usually sees short and sharp corrections following the rally, such as the one the market saw in March.
Emkay's target for the Nifty 50 remains at 24,000, using the LTA Nifty P/E as the anchor. According to Emkay, consumer discretionary, materials, and industrials are overweight sectors, while financials, IT, and FMCG are underweight. The best picks of Emkay are Ambuja Cements, TVS Motor, and Zomato.
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