The previous year 2017 had been one of the best year for smallcaps, as evidenced by the rise in BSE smallcap index which returned nearly 60% since January, while the BSE Sensex returned below 30% in the same period. Interestingly, top fund manager, Sunil Subramaniam of Sundaram Mutual Fund says that smallcaps will continue to outperform largecaps even in 2018. “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.
According to the expert, earnings will be an important driver for smallcaps and midcaps. “Fundamentally, what is happening is that the market is now shifting to earnings. The valuations story has been played up. There is a pickup in valuations from the lows of 2013-2014 till now. So the PE rerating story is kind of approaching its end but the earnings growth driver for small and midcaps is economy. From that perspective, the economy is poised for a take-off and hence small and midcaps being cyclical in nature, both the operating leverage and the financial leverage aspect should come in and aid them in delivering better returns,” he told the channel.
While the index had returned around 60% last year, a few stocks in the index such as Indiabulls Ventures, HEG, Graphite India and Avanti Feeds have had a dream run at the bourses. IndiaBulls Ventures had given a staggering 1,185%, while shares of HEG redturned more than 1,382% last year.
What are his top bets from the space? “The players largely remain the same because they are essentially infrastructure companies. From a commodity perspective, cement and steel should lead the rally because of infrastructure. The sector which last year was not so great and we see shifting is IT because the world economy will be picking up and IT is that industry which is going to ride on that. This year, IT could do much better than last year,” Sunil Subramaniam pointed out.
In its latest Financial Stability Report, RBI says that the Indian investors have shown an increasing preference to midcap and smallcap 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.