The big stocks became bigger in 2019 while those in the small and midcap space shrank as those schemes closed in the negative. The benchmark indices hit record highs during the year.
The Sensex rallied 14.38 percent, while the Nifty rose 12 percent, outperforming small & midcaps stocks. Meanwhile, the BSE Midcap index fell a little over 3 percent, while the Smallcap index was down nearly 7 percent during the same period.
The year 2020 could change that, say experts. The right way to pick stocks is to look at them individually, and not because they are large, small or midcaps.
But, select stocks that belong to this space have the potential to give substantial upside in 2020, provided the economy shows signs of recovery, public and private spending picks up, and earnings revival, which most analysts are hoping for in FY21.
In terms of valuations, in CY19, midcaps were down 4.3 percent as against the Nifty’s rise of 12 percent. Over the last five years, midcaps have underperformed by 11 percent.
The Nifty Midcap100 P/E ratio now trades at 19.7x from 20.5x in December 2018, while midcaps are trading at 7 percent premium to largecaps.
After witnessing relentless selling in the last two years, experts say the time of select small & midcaps has come and they could outperform significantly in 2020.
“With liquidity and the return of risk-on strategy and an expected improvement in earnings growth, the rally is expected to spread to those quality stocks with moderate valuations in the mid and smallcap space,” Vinod Nair, Head of Research at Geojit Financial Services, told Moneycontrol.
“We are seeing polarized valuations between large and mid/smallcap stocks since money was chasing big and high-quality stocks. We have a lot of beaten-down stocks/sectors, which may be fundamentally strong, but have seen a huge value erosion,” he said.
Provided the right conditions (economy, liquidity), these quality mid and smallcaps could find favour with investors and stage a comeback in 2020, he said. It is a good time to slowly start increasing allocation to this space with an outlook of two-three years.
Experts say some of the high-frequency data points such as auto numbers, industrial production and credit growth for October and November do not give confidence that the economy has turned but the bottoming out process has begun.
“Small and midcap companies require a low-interest rate regime and a growing economy for sharp outperformance. The economy is still some quarters away from that sweet spot,” Shailendra Kumar, Chief Investment Officer, Narnolia Financial Advisor, said.
The sharp valuation de-rating of mid and smallcap companies over the last two years will, however, ensure that mid and smallcap companies perform in line with largecaps. “And going forward, once the economy picks up, these will start showing out-performance,” he said.
A list of 27 stocks in the midcap space which are top picks of brokerage firms for 2020:
Kotak Institutional Equities recommends investors to buy Bajaj Consumer, CESC, Equitas Holdings, Federal Bank, SRF, Tata Power, and Thermax.
Antique stock broking favours Alkem Laboratories, Chola Investment, Honeywell Automation, Gujarat Gas, APL Apollo Tubes and KNR Construction.
Disclaimer: The views and investment tips expressed by investment 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.
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