Mid- & small-caps regain mojo, catch-up rally likely to continue

stocks, Nifty, Sensex, BSE MidCap index

Mumbai: Mid- and small-cap stocks are back to their winning ways after a spell of weakness in July and August. With the rally in blue chips showing signs of fatigue after spearheading the record-breaking market rally in the past two months, analysts say smaller shares are better placed to gain in the near future.

“The outperformance of midcaps will continue. There was a short period of underperformance in July and August, which is over,” said Rohit Srivastava, founder, Indiacharts.com.

Mid- and small-cap stocks outperformed largecaps on Wednesday. The BSE MidCap index, which had hit a record high of 25,435.39 on Friday, rose 1.5% at 25,166.54. The SmallCap index, which also touched an all-time high of 28,456.9 on Friday, closed at 27,856.10 on Wednesday, up 1.2% over its previous close. The Sensex, however, ended down 78 points, or 0.13%, at 58,927.33.

Money managers say mid- and small-cap stocks are seeing a catch-up rally after the recent underperformance.

“There is a valuation gap between large-caps and mid-caps after Nifty’s outperformance in August. Mid-caps are clearly better valued,” said Kunj Bansal, CIO, Karvy Capital. “What is different this time is that quality mid-caps and stocks mirroring some of the recent quality IPOs are doing well.”

stocks, Nifty, Sensex, BSE MidCap index

Edelweiss Securities said trends of the past decade and a half showed relative performances between large-cap, small- and mid-cap indices usually result in reversion to mean. SmallCap and Midcap indices are up 3.4% and 5.5%, respectively, so far in September. The Sensex is up 2.4% during the same period.

In late-July and August, mid- and small-cap shares crumbled under selling pressure after outperforming the Sensex and the Nifty since January. Many stocks fell 10-30%, raising concerns that their 18-month rally is over for now. Analysts say there is still room for upsides.

“A mid-cap cycle usually lasts for two years and this current cycle started in 2020, and it may continue for another six months,” said Srivastava of Indiacharts.com.

Technical indicators are pointing to further gains in smaller shares. The mid- and small-cap indices are trading above their 50-day moving averages as well as 100- and 200-day moving averages, pointing to bullishness on charts.

Analysts say there are concerns that valuations of several mid- and small-cap stocks are stretched but the continued rush among retail investors is driving up the prices.

“With no major negatives around the horizon, investors are participating in mid- and small-caps and the technical correction has made select names more compelling to invest. We are in a bull market. The rally in mid- and small-caps will continue,” said Hemang Jani, head of equity strategy-broking and distribution at Motilal Oswal Financial Services.

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