Mid, small-caps likely to outperform large-caps in 2020, say analysts

After a subdued performance since the last two years, mid-and-small caps seem to be getting their mojo back with both these indices outperforming their large-cap peer. From their March 2020 low, the S&P BSE Mid-cap and S&P BSE Small-cap indices have surged 57 per cent and 49 per cent, respectively as compared to 47 per cent rise in the S&P BSE Sensex.

Even on a year-to-date basis, the returns have been better. The small-cap index on the BSE has moved up nearly a per cent. The mid-cap index, however, lost 3.7 per cent YTD, but is still better than the 7.5 per cent fall in the S&P BSE Sensex during this period, ACE Equity data show.

“The mid-and small-cap stocks had been badly beaten in the recent fall and the recovery across-the-board has been equally sharp. That apart, these two market segments have seen increased participation from the retail investors, who even invested in penny stocks in order to make quick money,” explains G Chokkalingam, founder and chief investment officer at Equinomics Research.

The relative valuation of midcaps versus large-caps are at a historically low level, said analysts at Elara Capital, while the rolling return discount of midcap versus large caps has begun to shrink. Attractive fundamental outlook and renewed investor confidence are among the key factors, they believe, that will keep stocks of information technology (IT) and pharma sectors buoyant going ahead.

“We read this as early signs of midcap recovery. On both these measures, the four-year midcap – large-cap premium has been practically wiped out. We now believe that valuations are reasonable and a midcap recovery is well underway,” wrote Ravi Muthukrishnan, head of institutional equity research at Elara Securities in an August 5 co-authored note with Pradeep Kumar Kesavan and Anushka Chhajed.

Among individual stocks, the return in some of the mid-cap and small-cap stocks have been much higher with nearly 180 stocks from these two market segments surging over 100 per cent from March 2020 low with Ballarpur Industries and McLeod Russel surging over 600 per cent since then, ACE Equity data show. On a YTD basis, however, around 30 stocks have doubled. Pharma stocks have been on investors' radar with Aarti Drugs, Laurus Labs, Marksans Pharma, and Shilpa Medicare surging between 135 per cent and 300 per cent during this period, data show.

Chokkalingam, too, expects the mid-and-small cap segments to outperform their large-cap peers in the calendar year 2020. “There is a huge investor appetite for equities now. Their preference for the mid-and small-caps will continue and the stocks of fundamentally sound companies will continue to do well in 2020,” he says.

At a macro level, however, the road ahead for the markets from here on, analysts say, would now rest on the inter-play of the health crisis and speed of demand recovery. Valuations, too, are a concern.

“After the rally from March 2020 lows, the Nifty at 21x price-to-earnings (P/E) is now trading at a premium to its long-period average; however, it is not looking as attractive as it did in March 2020. Polarisation remains a persistent theme. In an era where growth is scary, we believe such polarisation and divergence may persist till earnings see broad-based recovery,” said analysts at Motilal Oswal Securities.