5 reasons why you should rebuff largecaps & buy mid-, smallcaps

NEW DELHI: At the start of Calendar 2020, one worrying trend of 2019 is seemingly reversing on Dalal Street i.e. the battering of midcap stocks. Trends seen in the US, Japanese and European markets are confirming it and how!

Data suggests domestic midcap stocks enjoy consistent positive correlation with their global peers, with the latter being a lead indicator.

With the US and European midcap indices hitting fresh highs after two years of hibernation, empirical evidence favours domestic midcaps in the year ahead, suggests a study by ICICI Securities.


Besides, historical trends suggest whenever over 50 per cent of the NSE500 stocks move above their 200-day moving averages, it usually results in 40 per cent average return in midcap stocks. It has held true in four bull runs spanning over past two decades.

The midcap segments in many developed markets like the US and Europe crossed the threshold earlier in Calendar 2019, thus paving the way for midcaps to rally to record highs. India has just crossed the threshold.

“A secular bull market is ahead of us, as midcaps are on the cusp of a new uptrend. Therefore, investors should align/construct their long-term portfolios to benefit from the changing market dynamics with incremental weightage on quality midcaps,” ICICI Securities said.

Calendar 2019 was the first year when the midcap index in India delivered negative returns for two successive years. The BSE Midcap index shed 2.8 per cent in 2019 after a 13.38 per cent fall in 2018. That sets the stage for value buying in 2020.

In 2014, the same index had rallied 55 per cent after a 5.73 per cent fall in 2013. It gained 39 per cent in 2012 after a disappointing 34 per cent drop in 2011. The index rallied a massive 107 per cent in 2009 after a 67 per cent fall in 2008.

“In last two years, the combined market capitalisation of Group B shares of BSE – which represent smallcaps and midcaps – has fallen 63 per cent from a 2018 January peak of Rs 20.63 lakh crore to around Rs 7.65 lakh crore now,” said G Chokkalingam, Founder & MD at Equinomics Research Advisory.

“This makes the case for a rally going forward,” he said.

As money has gone only into select largecaps for some time now, their valuation gap with midcaps is are only rising, which could reverse to mean soon.

“The inflow of mutual fund money into only 15-20 largecap names is an unhealthy trend, which is going to change in the new Calendar,” says the Kochi-based investor Porinju Veliyath, who has predicted a rally in the broader market.

“Many stocks may surprise people at some point, as investors have turned hopeless on smallcaps even when they trade at just 3-5 PE multiples, but are growing at 15-20 per cent and offering 3-6 per cent dividend yields. Many of these stocks would spring a surprise,” he said.