The mid and small cap stocks are in focus as they continue to outperform the broader markets. So far this week, in the past two sessions, the BSE Midcap and BSE Small Cap indices have clocked a little under 2% gains each. Even on Friday, the broader markets are relatively higher when compared to their large cap peers. What does it signal?
Analysts views on midcap momentum
Is the current uptick a temporary relief or are there any definitive changes in the market trend? We reached out to a host of analysts to understand their views on the current momentum in small and midcap stocks.
Siddarth Bhamre, Head Institutional Research-Asit C. Mehta Investments Intermediates is clearly not convinced, “I won’t be carried away by this 1-2 day bounce. This is quite miniscule when you compare it with the savage correction that we saw earlier. The biggest concern is that the Mutual Funds have not started selling mid and small caps yet. The bulk of the buying in this space has been by them over the last 1-2 years. A comparison of the price action and various valuation multiples indicate that the midcap valuations are still rich. Not wise to won’t venture out for midcaps at current levels. Any distinctive trend reversal always starts with the large caps. Therefore till the time large caps start performing well, it is not wise to build a midcap midcap portfolio.
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services corroborates the views and adds that, “FIIs are likely to continue selling putting pressure on large caps. This will make mid and small caps relatively attractive in the near-term. But the broader market is still overvalued and therefore the focus is likely to be on fairly valued midcaps like defence stocks and other fairly valued segments.”
Kotak warns of sharper correction in mid and small caps
Interestingly Kotak Institutional Equities had released a report a few days ago and raised the red flag on small and midcaps. We had reported on February 18 and in that report, Kotak had highlighted that the valuations of small and midcaps continue to be stretched despite the recent correction. They are seeing the overall valuations close to what can be termed as frothy zone. “Nonetheless, valuations are still fair-to-full-to-frothy for most parts of the market. The mid-cap., small-cap. and ‘narrative’ stocks will likely see further sharp correction,” they stated. This is why, the expect another bout of sharp correction in these stocks.
Key data and Nifty levels to watch
Given the current market sentiment, Siddhartha Khemka, Head – Research, Wealth Management, Motilal Oswal Financial Services believes that though the broader markets show relative outperformance, macro data is a key factor to watch out for, “Broader market indices continued to outperform. On the macro front, preliminary release of February-month manufacturing and services PMI of US and India tomorrow, will be the key data to watch out for. We expect Nifty to consolidate near its current levels in the absence of any fresh triggers.”
Shrikant Chouhan, Head Equity Research, Kotak Securities suggests that, “A breach of 22800/75500 could change the sentiment, potentially leading to a retest of the 22725-22650/75200-75000 levels. Given the current market texture is non-directional, level-based trading would be the ideal strategy for day traders.”
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