Santa Claus rally in mid, smallcap stocks? Here's how you can benefit

Mid, SmallCap stocks to buy: Analysts suggest investors buy only those stocks of those companies where there is earnings visibility for at least a few quarters

After a sharp fall that took most frontline indices, especially the mid-and small-caps in a 'correction' phase with a drop of over 10 per cent from peak levels, December month has been good thus far for the markets.

 

While the Nifty 50 index has moved up 2.1 per cent in December, the gains in the mid-and small-caps have been sharper with both the indices surging 5.1 per cent and 5.4 per cent thus far during this period, data shows.

 

In the last five years (since 2019), markets have given a positive return every time in December, except in 2022 when the Nifty, Nifty Midcap 100 and the Nifty Smallcap 100 indices struggled. 

Source: Bloomberg | #Till Date (December 11 close) | Data Compiled by BS Research Bureau

 

So what does the rest of the month hold in store? Will the markets see a 'Santa Claus' rally this time around?

 

Many consider the Santa Claus rally to be a result of people buying stocks in anticipation of the rise in stock prices during the month of January, otherwise known as the January effect.

 

Even though the foreign institutional investors are slowly making their way back into the Indian markets, it is the retail investors, according to G Chokkalingam, founder and head of research at Equinomics Research, who are finding value in the battered mid-and small-cap stocks and driving the 'Santa Claus' rally in these two segments.

 

"A lot of fundamentally good stocks witnessed the brunt of the recent selling that drove the indices down in the last few months. Investors are now finding value in such counters. All this is driving stock prices higher, resulting in a Santa Claus rally, especially in the mid-and small-caps. Investors should opt for quality small-and mid-cap stocks with exposure of as high as 60 per cent to 70 per cent of their investible money. This strategy, however, is applicable only for those who can take significant investment risk with a medium-to-long term investment horizon of up to three years,” he suggests.

 

Among individual stocks that comprise the mid-and small-cap basket on the NSE, ITI Limited, Intellect Design Arena, Indraprastha Gas (IGL), BLS International, Angel One, BSE, CDSL, KEC International, RBL Bank and PB Fintech have been among the key gainers that have moved up 14 per cent to 36 per cent thus far in December, data shows.

 

In the short-to-medium term, Ajit Mishra, senior vice-president for research at Religare Broking expects the current range-bound movement in the large-cap stocks to end soon and sees the Nifty surpassing the 24,800 resistance level.

 

While sectoral participation remains selective, Mishra expects banking and information technology (IT) sectors to play a pivotal role in driving the next leg of the rally.

 

As regards the mid-caps and small-caps, analysts suggest investors buy only those stocks of those companies where there is earnings visibility for at least a few quarters and where the valuations have become reasonable.

 

But some are still cautious and suggest that the markets may not be completely out of the woods yet.

 

Anish Tawakley, co-chief investment officer for equity at ICICI Prudential AMC, for instance, believes that the market (at the index level) is not cheap and does not expect big returns in the near-term.

 

"Particularly, in small and mid-caps the risk-return trade-off is clearly unattractive," he cautions.