Mid and small-cap indices at 3-year highs

In the last two trading sessions, the mid- and small-cap indices outperformed the market, surging 6% and 7%, respectively, compared with a 2% rise in Sensex

Mid- and small-cap stocks continued their rise on Monday, with the S&P BSE mid-cap index trading at its highest since November 2010 and the S&P BSE small-cap index recording its highest since July 2011.

In the past two trading sessions, the mid- and small-cap indices outperformed the market, surging six per cent and seven per cent, respectively, compared with a two per cent rise in the benchmark index. On Monday, the indices rose four per cent and six per cent, respectively, compared with a one per cent rise in the benchmark S&P BSE Sensex and CNX Nifty. Meanwhile, the National Stock Exchange’s CNX mid-cap index closed 4.4 per cent higher at 9,908, its record high.

“After any election, if the sentiment turns out to be good, the small-and mid-caps tend to outperform large-caps in the near-to-medium term. We believe that the same pattern will be followed this time, too,” says R Sreesankar, head (institutional equities), Prabhudas Lilladher. “Earlier, we had recommended investors to remain underweight in defensive sectors such as information technology and pharmaceuticals and overweight in financials, automobiles, capital goods and materials. We continue to maintain the view and believe investors need to look more into many mid-cap stocks within these sectors, as we expect valuation expansion for mid-caps in this space because these will be the biggest beneficiaries of economic growth,” he adds.

With a clear decisive election result, analysts feel that fence sitters will also now start getting into equities, especially the mid-cap basket.

Kunj Bansal, executive director and chief investment officer, Centrum Wealth Management, says: “Buying interest is likely to spread from large-caps to mid-caps. Investors will look for pockets of undervaluation and sectors likely to benefit from policy initiatives, and put money there.”

Bank of America-Merrill Lynch’s managing director and head of research, Jyotivardhan Jaipuria, feels mid-caps will outperform large-caps, just as domestic plays will outperform exporters. His mid-cap buys include Eicher Motors, Motherson Sumi, YES Bank, Aurobindo Pharma and Bharat Forge.