2021 will belong to midcaps & smallcaps, says Dalal Street

2021 will belong to midcaps & smallcaps, says Dalal Street

MUMBAI: Midcap and smallcap stocks may continue their outperformance in 2021 as well, after beating the benchmark indices in the calendar year gone by. That’s the near-consensus view of a dozen analysts who took part in the ETMarkets New Year Survey this past week.

“Calendar 2021 should be the year of midcaps and smallcaps,” says Naveen Kulkarni, Chief Investment Officer, Axis Securities.

“We expect earnings to revive in 2021 and midcaps and smallcaps will see superior earnings growth in a reviving economy. Thus, Calendar 2021 should be the year of midcaps and smallcaps,” says he.

Sensex and Nifty have risen 14 per cent and 13 per cent, respectively, for the year to date, while BSE midcap and smallcap indices have risen 19 per cent and 30 per cent, respectively.

This outperformance came in after two years of negative returns from the midcap and smallcap indices, even as the frontline indices logged in gains.

Rising interest among first-time retail investors has also helped this pack, given the smaller investors’ penchant for hunting for value beyond the frontline stocks.

During April- September 2020, 63 lakh new demat accounts were added compared with 27.4 lakh accounts opened during the same period last year, an increase of around 130 per cent.

“This space has seen increased retail participation in recent times due to a shift in investing trends and rebound in economic growth,” Gaurav Garg, Head of Research, CapitalVia Global Research.

Garg expects midcap and smallcap stocks to continue their momentum on the back of expected double-digit returns, attractive valuations, strong earnings revival and robust institutional flows.

Deepak Jasani, Head of Retail Research at HDFC Securities, said one of the most distinguished characteristics of companies in this segment is higher growth rates than that for their larger peers.

“Investors have always flocked to this category in anticipation of higher returns, given their potential to report increased profitability and market share gains,” said Jasani.

Also, with economic growth expected to fare better in 2021, compared with that in 2020 when the onset of the coronavirus pandemic triggered lockdowns, bringing economic activity to a grinding halt.

Jasani said the Nifty Midcap100 index shows an extremely high correlation with GDP growth and compared with Nifty, this index has higher weightage in autos and auto components, consumer, real estate, chemicals & pharma and utilities – the likely beneficiaries of the structural tailwinds over next 18-24 months.

A low interest rate regime, which is here to stay for a while given the global scenario and the state of economy, also makes the case stronger for smaller companies, which have higher capital needs in the growth phase.

“Growth-hungry midcaps flourish in low-interest-rate regimes. Data shows a high correlation between repo rate and the ratio of Midcap index to Nifty50, again suggesting the likelihood of its outperformance over Nifty in the coming year if interest rates remain low,” Jasani said.

There are some concerns though, and preferred largecap stocks have seen a sharp runup, making stock valuations expensive.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, said Nifty MidCap100 Index traded at a discount to Nifty50 in terms of valuations at the start of 2020, but is now at a premium.

Based on Bloomberg consensus estimates, Nifty MidCap100 Index is now trading at 24 times on a one-year forward P/E basis vs 23 times for Nifty50.

“Between largecaps and midcaps, we would prefer the former as they could be more resilient in any future correction and also remain the favourites of the FIIs (foreign institutional investors),” Oza said.

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