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Last Updated : Mar 07, 2019 01:08 PM IST | Source: Moneycontrol.com

In last 15 years, mid and smallcap indices outperformed Nifty after general elections

Indian economy is well poised to grow at a healthy pace over the next two years providing a fillip to exponential profitability growth of 20 percent plus in the mid and small-cap space,Way2Wealth said

Sunil Shankar Matkar

After a lull of about 15 months, mid and smallcaps have seen a surge recently. The broader markets have outperformed the benchmark indices in the last 10 sessions.

Many sectors came to the fore and performed smartly. This could have been led by value buying as well as short-covering in many many stocks because they are trading far lower than their 52-week high or all-time high.

Attractive valuations have drawn investors towards quality stocks from the broader market, lifting Nifty Midcap and Smallcap indices 8 percent and 12 percent, respectively, since February 18. During the same period, the Nifty has climbed just 3 percent.

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After the liquidity crisis in September 2018, along with bad names, many quality stocks also perished and corrected sharply from their highs.

"Yes, many quality mid and smallcaps have come-off in the last 12 months, they are no more trading at frothy valuations they were at during second half of CY2017 and early CY2018. So from that perspective, cherrypicking some of those mid and smallcap and staying with them for next 2-3 years has the potential to deliver good returns," Sachin Shah, Fund Manager at Emkay Investment Managers told Moneycontrol.

As the general election inches closer, the positive momentum in the broader market indicates the bad phase is behind. But the question is whether this rally will continue after the election as well?

History suggests that after every general election, no matter who forms the government, there has been a market-wide rally. After the Bhartiya Janata Party (BJP) got a majority in 2014, small and midcap indices rallied 52 percent and 51 percent, respectively, in the next one year. The Nifty also jumped 27 percent in the same time period.

A similar trend can be seen after the earlier elections, highlighted in the chart below.

Image306032019

"It has been observed that investors remain cautious in run up to the general election with markets oscillating between greed and fear
without a clear trend. Past data offers support to the idea of taking advantage of these extreme periods of prolonged pessimism and

fear in order to earn superior returns over the long term," Way2Wealth said in a report.

Nifty, midcap and smallcap indices have registered a CAGR (compounded annual growth rate) of around 16.2 percent, 20 percent and 13 percent, respectively, over the FY03-19 period.

Attractive valuations along with improvement in asset quality, likely increase in government spending and a possible one more interest rate cut from RBI will boost the sentiments on the Street.

"The various government subsidies and schemes targeted to enhance rural income levels are finally reaping the rewards as consumption demand is witnessing a robust pick-up. Furthermore, GNPA levels in the overall banking system have begun to recede with most banks reporting robust growth in advances," Way2Wealth said.

Moreover, major economic reforms such as GST and RERA are offering a level playing field for all companies, it added. Therefore, Indian economy is well poised to grow at a healthy pace over the next two years providing a fillip to exponential profitability growth of 20 percent plus in the mid and small-cap space, it further added.

Siddharth Sedani, Vice President - Equity Advisory at Anand Rathi Shares and Stock Brokers also said: "India is the fastest growing economy in the world with robust fundamentals. There is no reason why the market will not reclaim the earlier record highs and grow further thereon. Indian macros are improving and now it's the turn for micros to deliver through earnings."

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First Published on Mar 7, 2019 01:08 pm
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