On the Sensex chart, Bajaj Finance was the top loser, dropping 4.63 per cent, followed by SBI, IndusInd Bank, Maruti, HDFC, Hero MotoCorp, Axis Bank, ICICI Bank and Reliance Industries. (Image source: Getty/Thinkstock)
After a lacklustre performance over the last two calendar years, the mid-cap and small-cap indices are showing some promise in 2020, with both the indices on the Bombay Stock Exchange surging by 5.7 per cent and 8.4 per cent respectively in January till date. This growth has come even as the benchmark Sensex (index of 30 bluechip stocks) has grown by only 0.7 per cent in this period, amid festering concerns over economic revival.
In 2018, while Sensex rose 5.9 per cent, the mid-cap and small-cap indices fell about 13 and 23 per cent respectively. Similarly, in 2019, while Sensex jumped over 14 per cent during the calendar year, the mid- and small-cap indices fell about 3 and 7 per cent respectively.
The stronger ability of bluechip companies to weather any stress in the economy saw both domestic and foreign investors park their funds with them over the last two years. However, since many bluechip companies are richly valued, experts say that any uptick in the economy could now see a rally in mid-caps and small-caps first.
“It is tough to say for the short-term, but over the next two to three years, we believe that mid- and small-caps will play catch-up as growth rate in the economy picks up,” said Mittul Kalawadia, fund manager, ICICI Prudential Midcap Fund.
While it is early to say that this could be the year of revival for mid- and small-caps, there is a view that a Budget aimed at providing a thrust to the investment and consumption engines of the economy and an uptick in revenue growth for companies will see the mid- and small-cap companies outperform as their valuations remain reasonable.
Some say the market always builds a gap between large-caps and mid- & small-caps, and the latter catch up when the former sees valuations getting rich. “When large-cap valuations go up, investors start looking at mid- and small-caps, and we are seeing them getting traction as of now,” said C J George, MD, Geojit Financial Services.
But does this rally in mid- and small-caps signal a revival in the economy? George says it could be the case. “While we are not seeing any significant pick-up in investments, credit offtake and consumption, it could be the case of market rising ahead of an uptick in the economy. Generally, there is a six-month gap between rise in markets and recovery in the economy, and sometimes it also happens that markets give confidence on the economy front,” he said.
For now, the rally in mid- and small-caps has been better for more reasons than one, as they have been driven by better than expected third- quarter result and good performance in quality consumer sector stocks.
“In mid-caps, the rally has been in two segments. The first has been in quality stocks which have gone up over the last few weeks. The other has been in small banks and NBFCs in the mid-cap segment. They have done well after they showed better than expected performance in the backdrop of economic slowdown and overall credit concerns. Their valuations were also reasonable. In the small-caps, consumer-oriented and other quality stocks that have announced good results have done well. Value basket in small-caps has also caught up to some extent on performance recently but are still underperforming quality and growth,” said Kalawadia.
On Friday, the BSE mid-cap index closed at an 18-month high of 15,822, whereas the BSE small-cap index closed at an eight-month high of 14,867. On Friday, among the mid-cap index constituents, while AU Bank witnessed a sharp rise of 10 per cent in its share price, ICICI Securities witnessed a 6.7 per cent rise in its share price. Among the small-cap index constituents, Sadhana Nitrochem jumped 20 per cent and GMM Pfaudler Ltd witnessed a 17 per cent jump.