Dalal Street’s second rung stocks, which peaked in early 2018, may hog limelight again on the back of robust liquidity in the system and attractive valuations compared with their largecap peers.
Data shows the BSE Midcap index (down 1.51 per cent year to date) and Smallcap index (up 4.51 per cent) have already outpaced BSE benchmark Sensex (down 6.40 per cent) so far in 2020 despite the ongoing uncertainties created by Covid-19.
Global brokerage Morgan Stanley is bullish on the broader market. It believes robust money supply and attractive valuations are setting the stage for outperformance of midcaps and smallcaps compared with the largecap peers in the coming months.
“With monetary aggregates normalising and significant policy action under way since the corporate tax cut last September, growth is set to turn. Smaller firms are likely to benefit more due to their operating and financial leverage. We are in the midst of a liquidity-driven rally,” it said.
On a year-to-date basis, more than 35 stocks from across sectors in the midcap and smallcap segments have more than doubled investors’ wealth till August 19. Ballarpur Industries has advanced the most at 393 per cent, followed by IOL Chemicals (up 375 per cent), McLeod Russel (320 per cent) and Aarti Drugs (316 per cent).
Among others, Vikas Eco Tech, Marksans Pharma, GMM Pfaudler, Laurus Labs, Opto Circuit, Reliance Communications, LT Foods and Tata Communications have also advanced over 100 per cent year to date.
Morgan Stanley likes 22 stocks from the midcap and smallcap segments. They include Tata Power, Sobha Developers, Shriram Transport Finance, Shriram City Union Finance, Prestige Estates, PNB Housing, Narayana Hrudyalaya, MCX, Mphasis, M&M Financials, Just Dial, Jubilant FoodWorks, JSPL, Indraprastha Gas, Gujarat Gas, Gujarat State Petronet, Exide Industries, CG Consumer, Bharat Electronics, Apollo Hospitals, Amara Raja Batteries and Aditya Birla Capital.
In general, analysts think lack of structural reforms could once again polarise market behaviour towards largecaps. Rising Covid-19 cases and expected stress in the financial system are among the key risks to this outperformance.
Motilal Oswal Financial Services’ high conviction midcap ideas include ICICI Securities, Laurus Labs, Tata Power, Crompton Consumer and Bharat Electronics.
Sunil Subramaniam, MD & CEO of Sundaram Mutual, says the ongoing move in midcap and smallcaps is just a bounceback and the actual rally is still sometime away.
“I would give it time to call it a sustainable rally in terms of the economy getting into a real V-shaped recovery mode. You will see much better returns from midcaps and smallcaps over next 18 months,” he said.
He prescribed a 50:30:20 kind to asset allocation to largecaps, midcaps and smallcaps in that order.