Small, midcap stock rally a pre-election phenomenon in stock market? Here’s what happened before

By: |
Published: March 8, 2019 4:54:20 PM

After prolonged underperformance, even as midcap and smallcap stocks bounced back in the last one month, stock market experts point out that that the street has witnessed similar rallies prior to general Lok Sabha elections.

Asian stocks jump on signs US, China close to trade dealSharing his view about the recent rally, Alok Singh of BOI-AXA notes that all those factors which induced volatility in the financial markets have moved towards the positive side.

After prolonged underperformance, even as midcap and smallcap stocks bounced back in the last one month, stock market experts point out that that the street has witnessed similar rallies prior to general Lok Sabha elections. “Many investors might be sitting on sidelines to wait for election-related uncertainty to subside before deploying capital, however, if history is anything to go by you either get a good entry point or certainty, but not both. We saw a similar pattern in 2013 when markets started rallying months before central elections,” Jatin Khemani, founder of Stalwart Advisors told Financial Express Online.

Sharing his view about the recent rally, Alok Singh, CIO, BOI-AXA Investment Managers notes that all those factors which induced volatility in the financial markets have moved towards the positive side. “This gave the positive momentum to the  market. The mid and small Caps significantly underperformed the large Caps , in what could be seen as the sharpest underperformance we have seen over the last 15 years,” he said. However, with improvement in macro scenario and valuations are looking reasonable post correction, he added.

Also read: Baba Ramdev plays desi card on HUL; calls for boycott after Brooke Bond Kumbh Mela ad fiasco

The small and midcap space had seen a terrible correction – median correction across 3,000 traded stocks from their 2018 highs was around 53% as on Jan 2019. “This has been one of the worst divergences between broader markets and frontline indices which were merely down 10% lifetime highs. Every time there has been a steep correction in a short period of time, the returns over the next 1-3 years have been very attractive, we saw this in 2008, 2011 and 2013,” noted Jatin Khemani.

Sharing his take on the segment, he said that small- and mid-caps may outperform large caps over the next 2-3 years.”Accordingly, in my view, investors should increase allocation to emerging companies. There are many well-run small and midcaps with leadership in their categories, debt-free balance sheets and ambitious owner-operators. Today one can deploy capital without taking balance sheet or management quality risk at a reasonable valuation which wasn’t the case over last 2-3 years due to steep valuations,” he added.

Investment advisor Sandip Sabharwal noted that many stocks have rallied 15-20% from the bottom. “However, if we look at it from the context of the levels from which they fell and where the overall large cap valuations stand today there is still a long way to go before we can say that the rally is over,” investment adviser Sandip Sabharwal told Financial Express Online. Notably, the Nifty Midcap Index has returned gained by more than 4.8% in the last one month, while the Nifty Smallcap index is up by more than 6.8% in the period.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.