Latest rebound in mid-cap stocks could sustain, revival on the cards: Elara

The latest rebound in mid-cap stocks could sustain as valuations are compelling, and a revival in on the cards, Elara Capital said in a note. According to the brokerage, the valuation gap between large-caps and mid-caps had recently dropped to historically low levels, making the latter attractive bets.

“We believe the valuations are compelling at these levels for a revival in the performance of mid-cap stocks, particularly the quality mid-caps, which have taken a substantial beating,” said Ravi Muthukrishnan, head of research, Elara Capital in the note to investors.

On Wednesday, the mid- and small-cap stocks extended their gains with the Nifty Midcap 100 index gaining 0.6 per cent, and the Nifty Smallcap 100 index soaring 0.7 per cent. A day earlier, the Smallcap index had posted its biggest jump in five months.

The latest jump in shares of the smaller companies comes after a year of sharp underperformance. 

“The rolling one-year return difference between mid-cap and large-caps had hit an historical extreme of -22 per cent against an average of 4.4 per cent,” the note said. Elara expects Nifty mid-caps to post compounded annual earnings growth of 22 per cent between FY19 and FY21. 

The earnings growth will be supported by benign input prices (crude and commodities), and robust consumption outlook, it said. Strong earnings growth forecast provides strong fundamental support, Elara said. The brokerage, however, is not ruling out heightened volatility over the short term. 

It noted the latest rebound in domestic and global markets had coincided with the supportive action taken by global central banks, including the US Federal Reserve.

“Globally, post the Fed’s pivot towards a dovish stance, other central banks have followed suit, including the European Central Bank, Bank of England and Bank of Japan. This, coupled with recent optimism over the US-China trade deal, has provided comfort,” said Muthukrishnan.