Small and midcap stocks which displayed robust performance in the September quarter include names like Energy Development Company, Jubilant Life, Dishman Pharma, Tiger Logistics, Inditrade Capital, KCL Infra, Uniply Industries, etc. among others.
When it is about generating wealth, history can throw up interesting facts. Anecdotal evidence suggests as much as 22 stocks on the BSE rose 40-160 percent in September quarter in the last two years.
For convenience, we analysed minimum historical return of 20 percent in the quarter which starts from July 1 to September 30. The results threw up stocks which have been consistent performers in the last two years in the same quarter.
The stocks are not recommendations from Moneycontrol but a mere analysis of the trend. Small and midcap stocks which displayed robust performance in the September quarter include names like Energy Development Company, Jubilant Life, Dishman Pharma, Tiger Logistics, Inditrade Capital, KCL Infra, Uniply Industries, etc. among others.
These companies have been consistent in giving returns which were above the returns given by the benchmark in the similar period.
Most of the stocks belong to the small and the midcap space which has been a standout performer not just in the past 2 years but 5 years.
Over the last five years, midcaps have outperformed the Nifty by a whopping 70 percent. Midcaps now trade at a 22 percent premium to the Nifty on a P/E basis, said a report.
Cheap valuations were one of the prime reason why investors flocked to midcaps along with consistent inflows from domestic institutional investors (DIIs) into the small and midcap space led to outperformance.
Domestic liquidity has been one of the major reasons for midcaps trading at a premium to largecaps. The domestic mutual fund flows into Indian equities YTD has been USD 10.5 bn as compared to USD 7 bn of FII flows.
“Typically, a large portion of FII flows go into large caps whereas, in case of mutual funds, a larger portion of the retail money goes into mid cap funds. Out of the monthly SIP of Rs.5000 crores coming into the mutual fund industry majority of the flows go into equities and within equities, a large portion goes into midcaps,” Rusmik Oza, Vice President - CorpRelations at Kotak Securities told Moneycontrol.
“It is the past outperformance of midcaps over large caps in India that could be drawing larger retail flows into midcaps,” he said.
Oza further added that the outperformance of midcaps could remain till the time Nifty does not correct meaningfully (as fall in midcaps is sharper when there is a meaningful correction in the Nifty).
What should investors do?
The broader market caught investors fancy back in 2014 when Narendra Modi took charge as the 14th Prime Minister of India. The liquidity driven rally which pushed most of the small and midcap stocks above historical averages now looks expensive.
Investors are advised not to allocate fresh money but could look at booking profits in stocks which have rallied a lot without any meaningful recovery in earnings.
“The mid cap index is trading at significant premium to its history and also relative to large cap indices,” Suresh Soni, Chief Executive Officer, DHFL Pramerica Asset Managers Private Ltd told Moneycontrol.
“Indeed, there are a large number of mid-caps where valuations appear stretched. We would advise, on an average, investors to favour large caps as opposed to mid and small cap at this stage,” he said.
According to Oza of Kotak Securities, geopolitical risk is highest risk/threat to the overall market and more for midcaps (because of the premium valuation over large caps).“Another near term risk could be GST implementation. H-FY18 is going to be painful in terms of earnings and market is betting on a sharp earnings recovery from 2H-FY18. Any slowdown in local flows could be another reason for sharper correction in midcaps but that is difficult to envisage at this juncture,” he said.The Great Diwali Discount!
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