Broader markets have underperformed benchmarks in the past 1 month as well as in 2023 YTD and experts expect this trend to continue in this calendar year.
In the last 1 month, the Nifty has lost around half a percent while Nifty Midcap and Nifty Smallcap indices have shed 2.8 percent and 3.3 percent, respectively. Meanwhile, in 2023 YTD, the benchmark Nifty is down 1.3 percent as compared to a 3.4 percent and 4 percent decline in midcap and smallcap indices, respectively.
However, in 2022, midcaps were almost in line with the benchmark. While the Nifty rose 4 percent in 2022, the Nifty Midcap 100 added 3.5 percent during the year. Smallcaps, however, massively underperformed the frontline indices, down over 12 percent in 2022.
Market analysts see the midcaps and smallcaps continuing to underperform benchmarks in 2023 on the back of broadening downgrades, weak fundamentals and earnings. Overall, analysts expect 2023 to be a tough year for equities due to high volatility.
Deepak Jasani, Head of Retail Research of HDFC Securities pointed out that history suggests that global stocks won't bottom until the Fed cuts rates. He believes there is a downside risk to FY24 consensus earnings and a limited scope of valuation upside, which will keep the upside for the index capped. This view could change if economic growth is seen accelerating and interest rates peaking soon across the globe and in India, he noted.
Amid this backdrop of higher expected volatility, let's take a look at what different experts advise. Should you buy midcaps after this recent correction or should you stay away?
Nitin Bhasin, Co-Head, Ambit Institutional Equities and Head of Research at Ambit Capital expect a continuation of small and midcap underperformance in 2023. The bulk of the trading is still happening in small and midcaps which portends caution. And, lastly midcaps ROIC-WACC spreads are at a peak which is likely to mean revert and as such EV/IC multiples are likely to contract as well, he stated. The midcaps and smallcaps are not yet cheap, especially midcaps. And with receding flows, he expects a continuation of underperformance.
Meanwhile, Jasani of HDFC believes the broader market space offers the best alpha over time and hence the tendency to keep looking at this space, however, he advises caution.
"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 of 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 up move will require good performance from the companies and risk appetite from investors," noted Jasani.
On the contrary, Gaurav Dua, SVP Head of Capital Market Strategy at Sharekhan by BNP Paribas believes that post the recent correction, the valuations have turned attractive. Nifty trades at around 18x FY2024 consensus earnings estimates which is largely in line with long-term average valuation multiples. As an investor, one should look at current volatility to accumulate quality stocks available at prices that are 15-25 percent lower than their 52-week high level. One needs to keep in mind the big picture of a multi-year upcycle in the Indian economy and the potential upside in equities over the next 2-5 years, he advised.
Dua suggested that investors should avoid expensive stocks that can suffer from de-rating of valuation multiples in a current tough macro environment and global uncertainties.
Also, in a recent note, domestic brokerage house Nuvama said that it expects both midcaps and smallcaps (SMID) to underperform benchmarks in 2023 on the back of broadening downgrades.
"We expect earnings slowdown to broaden heron. This is likely to weigh on mid-caps earnings more adversely… Hence, we continue to have a large-cap bias and recommend a move towards leaders," it said.
As per the brokerage, market share consolidation and shift from unorganised to organised has been the key market theme over the last five years. This shift has benefitted midcaps more than large caps as small shifts in their market share can result in much stronger demand and profit bounce, noted Nuvama. However, the environment is now changing with market share tailwinds behind and liquidity tightening. This typically tends to hurt listed companies; within it, the smaller and inefficient ones a lot more, the brokerage pointed out.
Most experts advise investors to pick stocks after doing a thorough analysis of the company’s financials and its industry standing. They advise picking quality stocks that are available at reasonable valuations irrespective of their market cap.
In the last 1 month, only 20 of 100 stocks in the Midcap100 index gave positive returns while the remaining 80 were in the red. Persistent Systems, Polycab India. Alkem Labs, Trent and Zydus Life were the top 5 gainers in the space, up between 7-19 percent in the past 1 month.
Meanwhile, 8 stocks gave negative double-digit returns in this period. Dixon Tech shed the most, down over 25 percent followed by Patanjali Foods, down 22 percent. JSW Energy, Nippon India, Tata Comm, Whirlpool, Deepak Nitrite, and United Breweries also declined over 10 percent each.