Mid, small caps to join bull run soon

Mid and small cap stocks, which continue to lag their all-time highs of May 10 by over 10 per cent, were expected to join the party in the current bull run, sooner or later, say analysts.

The Sensex, which tracks the top 30 stocks on the Bombay Stock Exchange (BSE), recorded its new all time high at 12,994 points on Tuesday.

In contrast, the mid-cap index highest closing in the current rally is 5,297.35 points, 735 points short of its May 10 high of 6,033.30, while small cap index stood at 6,398 points, 1,414 points below its all time high of 7,812.84 points.

"The movement in mid and small caps will continue, even though it may not match the pace of Sensex. Normally, Q4 results prove much vital for these stocks. The small and mid cap stocks had good Q1, followed by a decent second quarter. Few mid cap stocks are still going strong and others could gain pace in near term," Phani Sekhar, fund manager with Angel Stock Broking, said.

Normally, mid and small cap stocks are seen reacting sharply to market movements, as compared with large caps. Post May 10 high, when Sensex witnessed a month long correction, losing nearly 30 per cent to reach 8,929.44 points on 14 June, the mid caps lost 39 per cent and settled at 3,721.20 points against 43 per cent fall in small cap index, which was at 4,502.63 points.

However, post May 10, the movement in mid and small caps has not reflected the Sensex's movement.

Since the May 10 peak, there has been eight closings, where the Sensex has risen, while the other mid and small cap indices ended in red.

For 11 days it happened that small caps moved the opposite way, as compared with the Sensex.

"We expect the pace of growth in mid and small caps to be faster in the next two to three months even as the Sensex consolidates at current levels. But, at the same time, we have to remember, even shorter duration correction or fall in Sensex could hurt investor confidence in small and mid-cap stocks, which means growth of these indices will be based on the performance of Sensex," said Sekhar.

Fund house DSP Merrill Lynch, which recently launched a fund aimed at investing in small and mid cap firms, saw the two indices outperforming the large cap indices in the long term in its research and had said the current underperformance of mid and small caps has been a good opportunity for investors to "buy at a low price and sell at a high price."

Alok Agarwal, senior analyst with Motilal Oswal said that the mid and small cap phenomenon is bound to happen soon. "Slow but steady growth in these stocks can not be ignored," he said.

"I expect these stocks to move much faster once Q3 results are out. Their earnings have been robust this quarter and already some of them have gone up. As their earnings per share are keep on improving, the growth momentum will gather pace," he added.