Small, mid-cap stocks to remain in favour

“Mid & Small cap funds have accounted for disproportionate (1.7x of inflows in Large & Multicap) inflows CYTD & trend seems to be holding up. We like the SMID (small and midcap) space as it has a higher share of domestic economy stocks,” said analysts at Jefferies India Pvt Ltd said in a report.

Mid and small-cap stocks typically perform well amid stable or rising interest rates, which enhance their borrowing capacity for operational purposes. The current economic climate has been favourable for such stocks, with the Reserve Bank of India maintaining its monetary policy stance and inflation appearing to ease. These conditions, coupled with an improving earnings outlook, have boosted the appeal of mid and small-cap stocks. But that’s not all.

“Domestic capex cycle recovery is a key theme driving SMID cap outperformance with Financial, Industrials and Property contributing 51% of Mid cap index gains year-to-date. Indeed, 70% of the 96 industrials and realty stocks among NSE500 have delivered higher gains than the median gain of 6%,” said the Jefferies report. They feel large-caps have limited options to play the investment cycle and the spillover of demand to SMID caps can drive large outperformance.

Sharing Jefferies’s optimistic view, analysts at Nuvama Research point out that the Nifty Midcap 100/Nifty 100 ratio is at 0.84X. “The ratio signifies strength of Midcap Index over Nifty 100 (Heavyweights),” said the Nuvama report. 

But despite the allure of mid and small-cap stocks, analysts caution investors to remain selective, as these shares often sustain more significant losses than large-caps during market corrections.

Updated: 26 Jun 2023, 11:07 AM IST