Midcaps and smallcaps underperform Nifty in the last 1 month: Should you accumulate or stay away?

The midcap and smallcap stocks have begun underperforming benchmarks since October after being outperformers in the past few months.

The Nifty Midcap and Nifty Smallcap indices are down 1.5 percent and 0.5 percent, respectively, in November so far as against a 1 percent rise in Nifty.

In October, the Nifty Midcap and smallcap indices rose 2.5 percent each versus an over 5 percent rise in the benchmark.

Between July till September, the midcap and smallcap indices up 16 percent and 12 percent as against an 8 percent rise in Nifty.

The recent underperformance by the broader markets has also turned them negative for the last 1 year. In this period, Nifty Midcap is down 1 percent while Nifty Smallcap has shed over 12 percent. In comparison, the benchmark Nifty has added 2 percent in the last 1 year.

In the last 3 years, however, the performance of broader markets has beaten the benchmarks. While Nifty Midcap and Smallcap have rallied 83 percent and 69 percent, respectively in 3 years, the Nifty has risen 53 percent.

The volatility in the markets, domestic and global, amid fears of recession, rising rates, and persistent inflation has led to investors shifting more towards bluechips. Further, the outperformance in the earlier months has also led investors to sell mid and smallcap stocks to book profits amid volatility.

But now that the midcaps and smallcaps have corrected some, is it time to accumulate them? Let's find out

Satish Menon, Executive Director at Geojit Financial Services noted that though the Indian market has been resilient in 2022, smallcaps have taken a beating. He believes that due to their discounted valuation, they are a good long-term investment.

Regarding midcaps, he said that they have broadly reverted from lows during the year in-line with large caps and valuations are near the long range.

"The outlook is attractive on a medium-term basis. However, volatility is anticipated in the short term due to uncertainty about the performance of the global stock market in 2023 due to the threat of a recession, high inflation, and an aggressive monetary policy," he noted.

Meanwhile, Naveen Kulkarni, Chief Investment Officer, at Axis Securities stated, "Mid and small caps performed well over the last two years. In the last year, small caps have taken some beating, although the underperformance is not significant. Overall, small caps are still a good space to invest."

He advises investors to pick stocks after doing a thorough analysis of the company’s financials and its industry standing and then pick quality stocks that are available at reasonable valuations irrespective of their market cap.

Deepak Jasani, Head of Retail Research at HDFC Securities believes that the broader markets offers the best alpha over time and hence the tendency to keep looking at this space.

"Small and midcap stocks had run up quite well between June and Sept 2022 and in some cases, their valuations ran ahead of time. Also, some of these stocks posted unencouraging numbers in Q2FY23 results. This led to some of these stocks underperforming. Investors need to keep checking the growth rates expected with the valuation in these stocks to decide their strategies. Also, the fact that FPIs have largely stayed away from these stocks over the past few months means that the next upmove will require good performance from the companies and risk appetite from investors," pointed out the expert.

Market experts believe that a disciplined approach to investing in good quality companies over the next few months can be a good strategy to make the most of the lower investor appetite for mid and small-cap companies during a tough macro environment.

One should prefer mid and small companies which offer a higher earnings growth trajectory compared to large companies can thereby significantly create more wealth over long periods of time but it is important that one needs to be cognizant of their risk appetite.

It is important to note that while midcaps and smallcaps can provide better returns than largecaps at times they are also extremely high risk. Investors with a risk-averse appetite should stay away from such stocks or invest a very small portion of their portfolio in them. Such stocks are more suited for high-risk investors. One must always consult their financial advisor before making any investment decisions.

Top Picks

Equirus Capital prefers Polycab India, Apollo Tyres, JK Cement, IDFC Bank, Uno Minda, Century Ply, Oberoi Realty, Persistent Systems, ABFRL, and Carborundum as its top midcap picks.

Meanwhile, Motilal Oswal has chosen Varun Beverages, Ashok Leyland, Jubilant Food, IDFC First Bank, Vinati Organics, Metro Brands, Angel One, CAMS Services and Lemon Tree Hotels as its top mid/smallcap picks.

Stocks

In the last 1 month, only 20 stocks from the Nifty Midcap 100 index have given positive returns while the remaining 80 are in the red.

Page Industries have lost the most, down 12 percent followed by SRF, LIC Housing and Coromandel Intl, which have shed around 10 percent each. Other losers include Tata Chemicals, Emami, Bata, Mphasis, Polycab India, Laurus Labs, Whirlpool, Astral, Tata Elxsi, Voltas and Deepak Nitrite, down over 5 percent each.

However, top gainers include Alembic Pharma, Dalmia Bharat, Adani Total Gas, Cummins India, L&T Tech and Endurance Tech, up over 10 percent each.

Meanwhile, in the smallcap space as well, only 20 stocks have been in the green in the last 1 month while the remaining 80 have given negative returns. SREI Infra has lost over 30 percent while Jet Airways has cracked 26 percent. Chennai Petroleum, Omaxe, and Century Ply have also tanked over 12 percent each.

Godfrey Phillips is the top gainer in the smallcap space in the last 1 month, up 31 percent followed by JK Lakshmi Cement, and Timken India, up 19 percent each.