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Mid, smallcap rally may pause to take a breather in Samvat 2081: Analysts

Stock Market Samvat 2081 Outlook: Analysts suggest investors put most of their investible surplus in the safety of large-cap stocks

Mid, smallcap rally may pause to take a breather in Samvat 2081: Analysts

Even after the recent correction, the BSE Small-cap Index trades at 40-45 per cent premium to Nifty

Puneet Wadhwa New Delhi

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Samvat 2081 Outlook: After a stupendous run in the midcap and the smallcap indices that surged 46 per cent and 43 per cent respectively on the NSE in Samvat 2080, the rally in these two markets segments may pause to catch its breath in Samvat 2081, suggest analysts.
 
In comparison, the Sensex and the Nifty gained 26 per cent and 29 per cent, respectively during this period, data shows. 
 
The overall market mood, according to analysts, will remain positive in Samvat 2081 as long as the geopolitical situation across the globe, especially West Asia, and crude oil prices remain in check. That apart, policies of global central banks, outcome of US presidential polls and corporate earnings growth back home will be on markets’ radar. 
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In this backdrop, they suggest investors put most of their investible surplus in the safety of large-cap stocks, and remain stock specific within the mid-cap and the small-cap basket. The risk-reward, they believe, appears much better in large-caps.
 
"The main driver of the bull-run in Indian equities has been the sustained domestic flows into the market, which has been absorbing all the selling by foreign institutional investors (FIIs). The domestic flows will continue to support the market but elevated valuations will put a cap on the upside. Nifty is likely to consolidate around 25,000 levels in the short-to-medium term," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.
 
Even after the recent correction, the BSE Small-cap Index, according to Gaurav Dua, senior vice-president and head of capital market strategy at Sharekhan by BNP Paribas, still trades at 40-45 per cent premium to Nifty on trailing 12-month earnings. 
 
"Also, the past experiences show that the small-cap/micro-cap stocks tend to slip into a deeper correction post 17/18 months of one-way rally. Historically, the small-cap index corrected by 15-25 per cent and individual stocks saw much deeper correction. Accordingly, we have been recommending investors to reduce exposure to small/micro-cap since early September 2024," Dua said.
 

Worrying signals

 
Another worrying factor for the markets, analysts said, is the sticky inflation and the Reserve Bank of India's (RBI's) move to keep rates steady, at least for now. Demand conditions, they believe, remain uncertain and prolonged rains and floods have affected growth in the September 2024 quarter (Q2-FY25).
 
Rural demand is slowly recovering, suggests Amnish Aggarwal, head of research at Prabhudas Lilladher, and recent initiatives to improve rural incomes by increasing minimum support price (MSP), raising import duty on edible oils, allowing export of onions and removing price caps on rice exports will boost farm incomes. These measures, he believes, might jack up food inflation in coming months. 
 
That said, capital goods, infra, ports, hospitals, tourism, new energy, e-com and telecom are some of the emerging themes to invest in at right valuations, according to him. His bull-case Nifty target is 29,260, while the bear-case target stands at 25,080.
 
“Markets and street estimates factor in strong rebound in demand in festival and marriage season; any disappointment on this front can result in further cut in earnings per share (EPS) estimates on top of 3.8/2.8 per cent cut in EPS for FY25/26. We rollover to September 2026 and increase our base case Nifty target to 27,867 (26,820 earlier), which is around 12 per cent higher from the current levels,” Aggarwal said.
 

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First Published: Oct 23 2024 | 7:46 AM IST

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