Time to start buying small-cap, mid-cap stocks for the long-term: Analysts

After a sharp correction in the markets that saw the mid-and small-cap stocks take a beating in the last few weeks, analysts at slowing turning optimistic on these two market segments. They advise investors start selectively nibbling on these counters from a long-term perspective, but caution against sharp bouts of volatility in both these segments in the next few months.

Nifty Midcap 100 and Nifty Smallcap 100 indexes logged their last intraday all-time highs of 49,780 and 16,691 levels respectively, on February 8 and then lost 9 per cent and 16 per cent to their lows on March 14, driven by regulatory vigilance and the seasonal March phenomenon when investors tend to lighten their portfolio for tax harvesting and for advance-tax payment by March 15. Click to view JP MORGAN owned stocks with OW/N ratings

From a near-term perspective, analysts at J.P Morgan expect the small-cap and mid-cap stocks to remain volatile in the coming weeks, with margin funding and investor flows adding to risks. 

“Judging by previous corrections in the SMID space, there could be 5-10 per cent further downside from here. However, SEBI's stress test on SMID funds highlights ample liquidity that should help limit the risk of an extended or sharp sell-off,” wrote Rajiv Batra, Mixo Das and Khoi Vu of J.P Morgan in a recent coauthored note.

Since February 8 when then Nifty Midcap 100 and Nifty Smallcap 100 indexes logged their last intraday all-time highs, nearly 607 stocks of the 1127 mid-and small-cap counters have recorded a fall in double digits, shows ACE Equity data.

Sanmit Infra, India Pesticides, Onmobile Global, IFCI and HLV Ltd are five stocks from this space that have slipped over 40 per cent during this period, shows data. Indo Amines, IIFL Finance, Ramky Infrastructure, Andrew Yule & Company, MTNL, Sandur Manganese & Iron Ores, Indo Rama Synthetics (India) and Jaiprakash Associates are some of the other stocks that have slipped 30 - 40 per cent during this period, shows data.

G Chokkalingam, founder and head of research at Equinomics Research, too, remains optimistic on the long-term prospects of mid-and small-cap stocks, but cautions against the near-term volatility in these two market segments amid global and local developments.

“We continue to believe that the outlook of the domestic equity market is very impressive in the medium to long-term. Even small-and midcap stocks will do very well in the long-term. However, these stocks may face significant pressures in the short-term due to overall sentiment. In this backdrop, the large-caps may outperform significantly,” he said.

Sector watch

Beyond near-term volatility, analysts at J.P Morgan believe small-and midcaps offer higher exposure to favorable themes like manufacturing, infrastructure development, electric vehicles (EV), digital transformation, green energy and sustainability; and have historically offered higher Sharpe ratios and higher alpha opportunities.

 

“These higher returns are driven by superior earnings growth CAGRs for mid-caps/small-caps, estimated to be +60 per cent/+24 per cent respectively for CY2021-25. Higher growth also supports a valuation premium, in our view, which for mid-caps has now pulled back from 38 per cent at end-Jan to 23 per cent now (close to the 19 per cent average since 2019). In our view, the recent correction creates opportunities to accumulate quality stocks in the small-and mid-cap space in India,” analysts at J.P Morgan said.