Small & midcap stocks back in the mix; outpace bluechips in latest market rally

Despite the surge, the Nifty Midcap 100 and Nifty Smallcap 100 indices are down 4and 9.5 percent each since the beginning of the year.

India’s mid and smallcap stocks have staged a strong comeback, shaking off months of underperformance and valuation concerns to deliver double-digit gains in just over two weeks. Since April 7, the Nifty Midcap 100 and Nifty Smallcap 100 indices have surged 13.2 and 11.4 percent, respectively, comfortably outpacing the Nifty and Sensex, which have gained 9.6 and 8.6 percent over the same period, Bloomberg data showed.

The rally marks a sharp shift in sentiment for broader markets, with technical triggers, steady domestic liquidity, and renewed investor confidence in India-centric sectors playing a key role.

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According to Rajesh Palviya, Head of Technical and Derivative Research at Axis Securities, the turnaround in the broader market began once the Nifty and Bank Nifty moved decisively above their 50- and 100-day moving averages. "That breakout signalled a short-term bullish trend, and it brought back participation across segments," he said. Once large-cap benchmarks regained momentum, many oversold mid and smallcap stocks quickly caught investor attention, leading to a sharp bounce.

Palviya highlights that India-centric companies have led this move, as they’re shielded from global disruptions. As selling pressure from foreign institutional investors (FIIs) began to ease and global markets found some stability, investor comfort improved, paving the way for a rebound in segments that had previously been hammered.

While FIIs tend to focus on large-cap names, it’s domestic mutual funds and high-net-worth individuals that have taken the lead in the mid- and small-cap space. “Domestic flows have been the backbone of this rally,” Palviya said in a conversation with Moneycontrol. "During the first leg of the rebound, sellers were absent and even low volumes were enough to push prices higher." He adds that many investors were unwilling to exit their holdings at depressed levels, especially those with conviction in India’s long-term growth potential.

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The rally has also been broad-based across themes. Sectors such as defence have bounced back strongly, supported by a pickup in order flows and previous underperformance. Fertiliser and chemical stocks have rallied too, helped by expectations of a strong monsoon and India’s robust consumption trends. In particular, Indian chemical firms stand to benefit from global supply chain shifts, offering export opportunities as companies look beyond China.

Government capex is another key factor lifting broader markets. “Spending on rural infrastructure has supported demand in FMCG and rural-focused sectors,” Palviya noted. He adds that textile companies, viewed as beneficiaries of the US-China trade tensions, and railway infrastructure names have also participated in the rally. Power sector stocks, meanwhile, have gained on expectations of rising electricity demand amid the ongoing weather conditions.

Still, Palviya is cautious on valuations. While the correction in recent months brought some froth out of the system, he believes the market isn’t yet in a deep value zone. "Valuations are not extremely attractive, but investors are chasing names with clear earnings visibility," he said. "Money is rotating into sectors with structural tailwinds, even if they’re not trading cheap."

Despite the surge, the Nifty Midcap 100 and Nifty Smallcap 100 indices are down 4and 9.5 percent each since the beginning of the year.

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