Bouncing back: Smallcaps set to post the biggest gain in five months

Analysts said selloff in small and midcaps dissipated fast, with investor interest in those stocks reviewing as they found value in certain small and midcap stocks following a sharp drop in valuations

The Nifty Smallcap 100 rose for a sixth consecutive day on Monday, extending its monthly gain to 11.4 per cent. The index is set to post its biggest monthly jump since November 2023. The Nifty Midcap 100 also gained for a sixth straight session, taking its April gain to nearly 6 per cent — its best monthly show since December.

Both indices had plummeted in March amid concerns over expensive valuations and a warning by markets regulator Securities and Exchange Board of India (Sebi) regarding a “bubble” buildup. However, they have more than recouped their losses — the Nifty Smallcap 100 index has surged over 20 per cent from its March lows, while the Nifty Midcap 100 index has climbed 12 per cent to trade at fresh highs. This rebound has propelled the market capitalisation of all BSE-listed firms to a record high of Rs 406.5 trillion ($4.9 trillion) on Monday. It was Rs 364 trillion at the start of the year. Both broad market indicators have outperformed the Sensex and Nifty this month, which are up 1.4 per cent each.

 

The benchmark indices, however, outperformed on Monday, with gains of over 1 per cent each, driven by sharp increases in banking stocks following better-than-expected quarterly profits from index heavyweight ICICI Bank. Shares of ICICI Bank rose more than 4 per cent to reach new highs, contributing to nearly 1 per cent of gains. Shares of other top lenders such as State Bank of India (SBI) and Axis Bank, too, hit record highs, driving the Bank Nifty index 2.5 per cent higher.

Market players attribute the rally in small and midcaps to flows from retail investors and domestic institutions, while the underperformance in largecaps is on account of selling pressure from foreign portfolio investors (FPIs) amid rising bond yields in the US due to expectations of delayed rate cuts, now pushed to December from June, in response to high inflation.

In April, FPIs were net sellers to the tune of Rs 8,677 crore.

“Trading in largecaps became risky amidst profit-taking by the FPIs. So traders shifted their focus to small and midcaps where foreign ownership is very less,” said Deepak Jasani, head of retail research at HDFC Securities.

Analysts said the selloff in small and midcaps dissipated quickly, with investor interest in those stocks reviewing as they found value in certain small and midcap stocks following a sharp drop in valuations.

“Quite a few stocks in this segment have reported good results, attracting retail investors and some HNIs,” said U R Bhat, co-founder of Alphaniti Fintech.

Chokkalingam G, founder of Equinomics, said millions of new investors are flocking to the market every week, who prefer mid- and small-cap stocks given the allure of high returns.

“There is optimism about policy continuity after the elections and another round of reforms and market boom. Even global markets are stable now, and investors there are focusing more on earnings and ignoring the muddled outlook for rate cuts and the geopolitical tensions,” said Chokkalingam.

Going forward, market experts said the outlook depends on the overall market conditions and lack of negative surprises regarding the outcome of the general elections.

“The benchmark indices have been resilient despite the FPI selling, but if major indices start falling, then investors too could become more circumspect in the small and midcap stocks,” said Bhat.

Following the sharp rebound, valuations have once again turned expensive, warn experts. The Nifty Smallcap 100 is trading at a one-year forward earnings price-to-earnings (PE) multiple of 20x, compared to a five-year average of 17x, and the Nifty Midcap 100 is trading at a one-year forward PE of 29x, compared to a five-year average of 21x.