Midcaps and smallcap stocks have had an excellent run at the bourses in the preceding year 2017. However, the S&P BSE MidCap index has undergone a correction of more than 1.5% in the last two weeks, and was trading at 17,667 this morning. The BSE MidCap index had closed at a record high level of 18,247.55 on January 8. Notably, the BSE midcap index has rallied by more than 48% in calendar year 2017, In comparison, the Sensex has returned 28%.
In a recent interview to The Indian Express, top banker Uday Kotak raised concerns over the surging stock market and India’s financial savings going into select smallcap and midcap stocks. “Money is coming to a broad funnel and it’s going into a narrow pipe where massive amount of Indian savers’ money is now going into few hundred stocks. And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small and mid-cap stocks is something on which we have to ask tough questions. Is there a risk of a bubble?,” Uday Kotak said.
According to RBI’s recent Financial Stability Report, Indian investors have shown an increasing preference to smallcap and midcap stocks in the last two years. “Another important feature of the evolution of Indian equity markets is investors’ increasing interest in small cap and mid-cap securities over the last two years as seen from a significant increase in turnovers in beyond top 100 scrips in 2016-17 over the previous financial year,” the report says.
In a recent interview with CNBC TV18, Andrew Holland of Avendus Capital said that midcaps and smallcaps would see a sharper decline in case of a stock market correction. On similar lines, cautioning investors about the volatility in the midcap stocks, Nilesh Shah of Kotak MF told CNBC-TV18 , “Midcaps will be highly volatile due to market movement or industry movement.” Sharing his market outlook for 2018 Nilesh Shah said, “ Not very single disrupting company will generate wealth. Disrupted versus disruptive is the theme for 2018.”
In view of a pick up in earnings in Q3, S Naren of ICICI Prudential MF said that largecap stocks will benefit more. “I believe when the earnings cycle improves, largecaps have a much bigger way to go. One of the reasons midcaps have done well is while local investors have been exuberant, foreign investors have hardly been exuberant in 2017. I still believe that largecaps will provide value to the investors,” S Naren of ICICI Prudential MF told CNBC TV18.
Sunil Subramanain of Sundaram Mutual Fund says that the gap in smallcap outperformance is likely to reduce going forward. “In 2018, we will see small-cap still outperforming large caps but the level of outperformance will not be as much as in the past,” Sunil Subramaniam told ET Now.
Smallcap and midcap czar, Porinju Veliyath says that the Sensex and Nifty returns will disappoint in 2018. “2018 as a calendar year I feel is going to be more challenging for the Sensex and Nifty perhaps but at the same time a lot of people will be again disappointed. The same people who were cautioning last one year, will be again disappointed next year when they numbers come up,” the expert told ET Now recently.