After having been hammered out of shape last year, midcap and smallcap stocks have rallied smartly this year. The midcap and smallcap indices have outperformed the bluechip indices so far in 2012 with several of their constituent stocks giving handsome returns. Since the start of the current rally, which begun this year, CNX Midcap and Smallcap indices have gained close to 25% against a 18.6% gain of the Nifty. The Foreign Institutional Investors (FIIs) have so far bought in $5.5 billion worth of Indian equities, according to Bloomberg data.
Typically retail investors invest in the smaller counters and those who bet on these stocks at the start of the year would have been rewarded. An analysis of performance of the constituents of CNX Midcap and Smallcap shows that almost 95% of the index constituents, for both indices, have posted positive returns in 2012 so far compared to 92% for the Nifty.
Further, as many as 15% stocks from these 100-scrip indices have posted more than 50% returns since start of 2012 compared to about one tenth of Nifty companies. There are as many as 3 from 100 companies that form both the indices which have more than doubled since start of January. Among Nifty companies, however, the highest returns posted so far in 2012 is a 77% gain reported by Reliance Infrastructure. According to analysts, during an uptrend, as the buying interest in the large-cap stocks saturates, investors try to capture value in the mid-cap space.?The demand for mid-cap stocks rises in an uptrend since most of the large-cap stocks get filled up with the buying fury. This results into a lot of mid-cap companies individually outperforming the broader markets, ? said an analyst.
Expectations of a possible interest rate cut by the Reserve Bank has resulted in a strong performance by companies from the interest rate sensitive sectors. As can be seen from the table, nearly 8 out of the top ten performers from the CNX Midcap belong to sectors like banking, capital goods, infrastructure and real estate. All three scrips, which has gained more than 100% since the start of the year, namely, HDIL, IFCI and Lanco Infratech belong to interest-rate sensitive sectors. Traders also seem to be overlooking the dismal financial performance of such companies in the last three quarters as more than half of these companies have reported a decline in their net earnings growth in nine months to December compared to a year earlier.
Another general trend that emerges among the midcap stocks is the underperformance of stocks from the defensive sectors even after their strong financial performance in the last three quarters.Seven out of the worst ten midcap performers of 2012 so far belong to sectors focused towards consumers, which mainly includes FMCG and healthcare companies.