Time to shun small and mid-cap stocks

MUMBAI: The small and mid-cap stocks may face rough weather in January and February if history is anything to go by. Data of past 10-14 years show that the small and mid-cap index on the National Stock Exchange (NSE) have given poor return in the month of January and February.

The Nifty Mid-cap index has given a return of -1.44% in the Month of January and -1.47% in the month of February since the index was first launched in 2001. Similarly, the Nifty Small-cap index has given -2.11% and -0.68% return in January and February respectively since the index was formed in 2004.

The fact that makes experts bearish on the small and mid-cap stocks is that in 2015 they saw strong outperformance compared to large-cap indices by a wide margin. In 2015, the Nifty Small-cap index gained over 6.4% while the Nifty Mid-cap index gained over 6.75%. In comparison, the broader index Nifty-50 fell by 5.72%.

“The historical data coupled with the prevailing sentiment definitely suggest that small and mid-cap stocks may witness terrible pain in the next couple of months,” said Sudip Bandyopadhyay, promoter Inditrade Capital. “Several small and mid-cap stocks that are not even part of the index have doubled and tripled in less than a year in 2015 and there is no justification in the current scenario.”

The overall performance and strength of Nifty Small and Nifty Mid-cap index gets magnified when one compares their performance with the annual low levels hit by the broader benchmark indices in September 2015. The NSE Small-cap index gained nearly 12.6% vs Nifty’s 0.22% and NSE Mid Cap gained 5.34% vs Nifty’s 0.22%.
“The small and mid-cap stocks may underperform Nifty and Sensex for many months to come now as the interest in these stocks may be extremely low given their recent outperformance and the prevailing global sentiment,” said Devang Kamdar, vice-president, Sharekhan.