Will the midcap party continue in 2017?

Even as the Nifty 50 is trying hard to lift its year-to-date (YTD) gains, midcaps seem to have sailed through the troubled waters rather easily. And, it is quite likely that with one trading session to go, the midcaps, as represented by the Nifty Midcap 100 Index, will outperform the bellwether Nifty 50 for the third consecutive year in 2016. 

Stocks such as Manappuram Finance, Indian Bank, Biocon, Sundram Fasteners, Indraprastha Gas and Balkrishna Industries are among the biggest winners within the midcap pack, with gains of 66-123% so far in 2016.

When seen against the performance of their largecap peers such as Glenmark Pharma, ICICI Bank and Bosch, which are likely to end the year on a flat note, these midcaps (stocks with market capitalisation between Rs 5,000-25,000 crore) stand out. While the Nifty Midcap has delivered roughly 6.3% YTD gains, the Nifty 50 is up two% gains so far in 2016. 

 

Higher growth opportunities were a prime valuation driver for midcaps, particularly for those in the consumer-oriented sectors such as health care, paints, fast-moving consumer goods or for those with indirect linkage to these sectors (auto components and engineering companies). 

Most experts are, however, now viewing this space with caution. That’s because, even as the midcaps continue to outperform the Nifty, the margin of gains between the two indices is thinning. 

2014, which was the year of bull-run for the Indian equities, saw the Nifty post 31% gains and Nifty Midcap 100 Index post steeper gains of 56%. In 2015, however, the differences in returns were narrower. 

If the Nifty ended 2015 in the red (down four%), gains for the Nifty Midcap 100 Index was only 6.5%. Performance in 2016 hasn’t been any different so far.  Ajay Bodke, chief executive officer and chief portfolio manager at Prabhudas Lilladher, points out that as markets may still be gauging the impact of demonetisation in the initial months of 2017, equities may remain choppy. “It’s tough to say if the midcaps can continue to outperform the largecaps for longer,” he says. 

Another senior executive of a domestic brokerage adds: “Since the largecaps have corrected significantly, the bull-run for midcaps will slow down in six to nine months. Also, if foreign portfolio investors once again become buyers of Indian stocks, they would stick with the largecaps,” he adds.

Deven Choksey, managing director of KRChoksey Investment Managers, has a stronger view. “Unfortunately, as 2016 was largely a traders-driven market and most investors stayed away, we didn’t find large-caps being bought much.” He adds: “With the recent correction in large-caps, I feel the craze for midcaps could die down in 2017.” Stocks such as Maruti Suzuki, Hero MotoCorp, Eicher Motors, Axis Bank, Siemens, ABB, Vedanta and ITC are among the preferred large-cap picks for 2017.

However, a few like Amar Ambani, head of research, IIFL, are more positive on midcaps. Ambani says: “There is more juice in the broader market than the Nifty stocks, as they have gained fair amount of visibility and some are even market leaders in their own ways.” He feels 2017, too, may belong largely to the midcaps. 

Stocks such as Greenply, La Opala, Kajaria Ceramics and Symphony, which command reasonable leadership in their industries, remain the preferred midcap stocks for Ambani.

The jury is still out on this.