Mid, smallcaps reach for the sky despite analysts sounding caution

In July, the S&P BSE Smallcap index surged 7.4 per cent as compared to 5.7 per cent rally in the Midcap index, and a modest 2.8 per cent gain in the Sensex.

Stocks of mid-and small-cap companies continued to gain ground in July despite analysts sounding caution on these two market segments given the sharp run thus far in calendar year 2023 (CY23).

Sanjeev Prasad, co-head, Kotak Institutional Equities (KIE), in a note co-authored with Anindya Bhowmik and Sunita Baldawa in June-end, for instance, had cautioned against the sharp run in the mid-and smallcaps.

“We do not see any particular reason for the excitement in mid- and small-cap stocks. We can perhaps understand the rerating seen in certain sectors, such as BFSI (smaller private banks), health care services (hospitals), and real estate, given their somewhat reasonable valuations before the recent rally and strong outlook,” he wrote.

Yet, in July, the market action continued in the small-caps that saw the S&P BSE Smallcap index surging 7.4 per cent as compared to 5.7 per cent rise in the S&P BSE Midcap index, and a modest 2.8 per cent gain in the S&P BSE Sensex. On Tuesday, the S&P BSE Smallcap index hit a fresh 52-week high of 35,253.2 levels in intraday trade.

Thus far in CY23, the midcap and smallcap indices on the BSE have gained nearly 22 per cent each as compared to a 9 per cent rally in the S&P BSE Sensex, data shows.

A large part of the rally, especially in the mid, small-caps, according to G Chokkalingam, managing director - research at Equinomics Research & Advisory, has been on account of retail investors lapping up these stocks in order to make a good return in a short time. This, he said, was evident in the number of demat accounts being opened.

“Last week also over 7.2 lakh new investors registered on the BSE platform, taking the total base of BSE to 13.76 crore. We continue to believe that the domestic market doesn’t have much liquidity to support the market in the very short-term if there are any adverse fundamental developments or any sentimental impact for the markets,” he said.

As an investment strategy, Chokkalingam remains cautious on the markets in the short-term and suggests investors tilt towards large and large midcaps to the extent of 30 per cent to 50 per cent in their portfolios.

“I prefer defensive sectors like pharmaceuticals and suggest investors exit over-valued small-and midcap stocks,” he said.

Meanwhile at the bourses, among the smallcap stocks on the BSE, shares of Jai Balaji Industries, Lloyds Engineering Works, Thangamayil Jewellery, Mazagon Dock Shipbuilders, DCM Shriram Industries, Action Construction Equipment, Jyothy Labs, Texmaco Infrastructure & Holdings, Sunflag Iron And Steel Company and Engineers India gained between 38 per cent and 107 per cent in July, ACE Equity data shows.

 

From a sentiment perspective, U R Bhat, Co-founder and Director, Alphaniti Fintech believes that the markets are pricing most positives at the current levels. Even a slight disappointment in the overall June 2023 quarter corporate earnings, or otherwise, can trigger a correction in the markets, especially in the mid-and smallcaps that have seen a good run recently.

“The FIIs have been intermittently selling and are looking over their shoulder for any bad news to exit the markets. That said, the correction/call will be gradual and not steep/sharp. The frontline indices can shave-off a couple of hundred points daily; and the market, therefore, sees a time and price-wise correction. In the worst-case scenario, the S&P BSE Sensex and the Nifty50 can slip 3 per cent to 5 per cent from here on,” Bhat cautions.