The BSE Midcap index fell more than 4 percent against 9.5 percent rally in the Sensex during last one year.
The broader markets gained momentum in the last one month or so, with the BSE Midcap index rising more than 2 percent, but underperformed the benchmark index Sensex which gained 4 percent in the same period.
Government measures including 10 percent cut in corporate tax rate played a key role in sentiment revival among not only largecaps but also midcaps.
Even if we compare the performance of last one year, the underperformance of broader markets continued. In fact this trend has been continued since 2018 especially after more than 40 percent growth in 2017.
The BSE Midcap index fell more than 4 percent against 9.5 percent rally in the Sensex during the last one year. If we exclude the last one month's performance from the last one year, the Sensex gained 5.6 percent while Midcap lost 6 percent, which means sentiments could be improving.
"The midcap and smallcap stocks have been underperforming since 2018 and have had a tough run owing to de-rating due to weak earnings as a result of poor demand, corporate governance issues (in few cases); etc. as well as mutual fund portfolio rejig. It appears that these concerns in few fundamentally sound small-cap and midcap stocks are overdone and we could see selective outperformance going forward," Ajit Mishra, VP Research at Religare Broking, told Moneycontrol.
However, the rally may not be as broad-based as it was seen in 2017 since investors are likely to be more selective in stock picking, he said.
This does not mean everything underperformed as 30 percent stocks among the BSE Midcap index gave double digit returns in the last one year, of which top 15 stocks rallied between 30-80 percent.
Those 15 stocks included Godrej Properties, Adani Power, Berger Paints, Muthoot Finance, Indraprastha Gas, Adani Transmission, Whirlpool of India, Colgate Palmolive, Oberoi Realty and Voltas.
The outperformance of these stocks is largely due to expected tax benefits and stable earnings performance from these companies.
"Tax benefits for newcomers will also attract new entrepreneurs and this may help the small and midcap sector to pick up the expected growth. We believe midcap and smallcap will outperform the largecap stocks," Gaurav Garg, head of research at CapitalVia Global Research Limited- Investment Advisor, said.
However, the underperformance of rest of midcaps is largely because of corporate governance concerns, weak earnings and slowdown. Among 70 percent of midcaps, top 25 stocks corrected between 30-95 percent including DHFL, Edelweiss, Glenmark Pharma, PNB Housing, IDBI Bank, RBL Bank, SAIL, JSPL, NBCC etc.
The reasons are the same for Sensex stocks also. Top 14 stocks gave double digit returns including Bajaj Finance, Asian Paints, Bharti Airtel, Kotak Mahindra Bank, ICICI Bank and HUL which gained 34-68 percent.However, among losers, Yes Bank, Tata Steel, Sun Pharmaceutical Industries, Tata Motors, Coal India, Vedanta, M&M, IndusInd Bank, ONGC, NTPC and ITC fell in double digits in the last one year.