In the past two weeks, the S&P BSE Smallcap index has outpaced the market by surging 6 per cent, as compared to a 3 per cent rise in the S&P BSE Midcap and 1.3 per cent gain in the benchmark S&P BSE Sensex.
Shankara Building Products, India Tourism Development Corporation (ITDC), Goa Carbon, HEG, Khadim India, Rain Industries, TVS Electronics and Liberty Shoes were among the beaten down stocks, which have rallied between 40 per cent and 73 per cent since September 3.
Till August 2019 -- the first eight months of the current calendar year -- SmallCap index had underperformed the market by falling 15 per cent, against a 13 per cent decline in the midcap index. However, the benchmark Sensex beat the broader indices by gaining 3.5 per cent during the same period.
A below par Q1FY20 earnings season, unabated trade tensions between the US and China, deteriorating domestic economic environment resulting in Q1FY20 GDP of 5 per cent, the lowest level since March 2013 and strong outflows from foreign portfolio investors (FPI) despite government’s withdrawal of capital gains tax surcharge, are some of the key reasons behind the downfall in the stocks.
According to market experts, relative valuation of midcap/ small-cap indices vis-à-vis Nifty indicates that their underperformance is unlikely to continue. A declining interest rate environment will be positive for equity markets and they expect an uptick in equity investments.
The Reserve Bank of India (RBI) has responded with 110 basis points (bps) rate cut over the last seven months to revive growth and analysts expect an additional 70-75 bps cut over the rest of the current fiscal year.
A slew of measures announced by the Finance Minister on August 23, 2019 were aimed at improving liquidity in the system; spur consumption demand and accelerate payments from government. All these, happening in an environment of globally benign commodity prices will benefit operating performance of corporate India, according to analysts at Elara Capital.
Given the expectation for further rate cuts, prompt transmission of rates and higher levels of shorter term debt in the system, the brokerage firm expects levered sectors and companies with strong fundamentals and higher proportion of shorter term debt to benefit disproportionately.
While Nifty has corrected 9 per cent from its June 2019 peak, the decline in small and mid-cap indices has been sharper. However, relative valuations indicate that mid-and-small-cap's underperformance is unlikely to continue, Equirus Capital said in India Strategy report.
|Company||30/08/2019||% chg*||LTP||% chg#|
|I T D C||168.60||-50.0||256.15||55.8|
|D B Realty||6.03||-78.7||9.28||54.7|
|Oswal Green Tech||8.60||-52.1||11.90||47.5|
|JK Agri Genetics||503.20||-48.0||699.80||46.4|
|Om Metals Infrap||15.12||-58.5||21.40||46.1|
|CG Power & Indu.||10.40||-76.9||15.69||43.7|
|*Change over December 31, 2018|
|#Change over September 3, 2019|
|LTP : Last traded price on the BSE at 09:48 am|