Small and mid-caps steal the show in Samvat 2080; outperform benchmarks

Samvat 2080 closes with small and midcaps leading the charge, gold gleams with a 32% gain, and bond markets poised for stability

If the Nifty50 returns of 25 per cent was impressive, the broader market performance was nothing short of stunning in Samvat 2080.

 

Both the Nifty Midcap 100 and Smallcap 100 indices clocked returns of around 38 per cent each, outperforming the Nifty by almost 13 percentage points. They have outperformed the index by a wide margin in three out of the last four Samvat years. Given their sharp outperformance, experts are advising investors to proceed with caution.

 

Strong domestic liquidity, underpinned by strong flows into small-and-mid-caps mutual fund schemes, buoyed the broader market during Samvat 2080.

 

Between November 2023 and September 2024, smallcap and midcap funds recorded net inflows of nearly Rs 53,000 crore. They accounted for 17 per cent of the Rs 3 trillion net inflows into active equity schemes during this 11-month period. These inflows, which were driven by the strong performance of smallcap and midcap funds across time-frames, were higher than most other fund categories when compared, excluding the new fund offering (NFO) collections. 

 

The advent of new investors, who typically prefer mid and smallcaps over large-caps, too have aided the run-up in the broader markets. The number of dematerialised (demat) accounts used for holding shares and other securities electronically reached 175.4 million, marking an average addition of 4 million monthly accounts since the beginning of 2024.

 

“It’s easier for any investor money to move to the mid and smallcap than large cap. In a bull market, every segment or sector that moves fast always gets the maximum attention and liquidity. And in the last 12 months, markets have been driven by more of liquidity than fundamentals,” said Ambareesh Baliga, an independent equity analyst.

 

The exuberance in the mid-and smallcap space has elevated the valuations. Despite the correction in October, the Nifty Midcap 100 is trading at 30.9 times of one year forward earnings against its 10-year average of 17. And the Nifty Small Cap 100 is trading at 23.4 against its 10-year forward of 16.4. Market experts said that the elevated valuations and earnings disappointments had raised concerns about the sustainability of the rally.

 

“Valuations are highly stretched in the small and mid-cap space without any proportionate achievement on the profit growth side. As a category, they may not outperform the indices going forward,” Chookalingam G, founder of Equinomics.

 

However, Chokkalingam added that investors should consider high-quality mid-cap companies that have experienced significant valuation corrections.

 

“Many of the index constituents and the sectors they operate are facing the problem of single-digit revenue growth. But one can spot winning ideas in the broader markets. In the recent correction, many stocks have become attractive. Wealth creation will happen only in this pack. Investors should take buying calls based on valuation multiples and earnings growth,” Chokkalingam said.