The midcaps have been relative underperformers in 2025. UBS, however, in a recent report, “pointed out in terms of valuation, there was only a marginal correction, with the Midcap index’s valuation (one-year-forward PE) down roughly 10% in 2025 but still at premiums to its five-year-average and the Nifty.”
They highlighted that though they “anticipated a sharper correction, domestic fund flow continued to support SMIDs, and we are concerned a reversal could impact their performance.” According to their analysis, “domestic fund managers are pivoting toward large caps for their funds, which may continue to pressure SMIDs.”
UBS: Midcap valuations still above Nifty despite correction
UBS said that even after the correction seen in 2025, MidCap valuations remain higher than large caps. “In terms of valuation, there was only a marginal correction, with the Midcap index’s valuation (one-year-forward PE) down roughly 10% in 2025 but still at premiums to its five-year-average and the Nifty,” UBS said, indicating limited downside from valuations alone.
UBS: Fund flows remain key support for SMIDs
UBS said fund flow into SMID funds and other schemes with SMID exposure remained strong in 2025, with cumulative inflows up 37% year-on-year. The brokerage said focused mid-cap and small-cap fund flows rose 46% and 53%, respectively. “This remains a key reason for the SMID indices’ sustained performance,” UBS said, while cautioning that any reversal in flows could be detrimental to performance, even though current trends do not yet suggest a slowdown.
UBS preferred investment approach
The question then is how one fashions one’s investment approach? UBS prefers a bottom-up or sector-specific approach. The international brokerage house undertook an analysis of 20 segments that predominantly consist of SMIDs, such as chemicals, home improvement and exchanges and “most are trading close to their five-year-average multiples, while a few (eg, hospitals, cables, capital markets) are trading at premiums.”
UBS on top midcap sector preference
Here is a quick look at the key sectors with predominantly small and midcaps plays that are in focus-
Home improvement and pipes
UBS said the home improvement segment continues to trade below historical levels amid soft demand. “Overall, the home improvement segment (tiles, plastic pipes) is trading at a 15% discount to its long-term average, with relatively soft demand,” UBS said. The brokerage added that tile and ceramic companies are trading at around a 25% discount to long-term averages due to demand moderation and competition from unorganised players, while plywood companies are closer to historical levels.
Hospitality
UBS said listed hospitality stocks are trading below historical norms after prices remained largely range-bound over the past two years. “Currently, the sector is trading 15% below its five-year average, amid concerns about a potential cycle peak,” UBS said. The brokerage added that demand continues to exceed supply, particularly in the luxury segment, and expects average room rate growth to normalise to mid- to high-single-digit levels over the next two to three years.
Diagnostics
UBS said diagnostics valuations are close to long-term averages, but performance within the segment has varied across companies. “The sector’s average valuation is close to its long-term historical level; however, performances within the sector remain mixed,” UBS said. The brokerage noted that market leader Dr Lal PathLabs is trading at around a 20% discount to its historical average valuation following a period of moderation.
Chemicals
UBS said valuations in the chemicals segment are broadly aligned with long-term averages, though outcomes differ sharply at the company level. “We considered 13 companies in the sector, and their overall valuations are near their long-term averages,” UBS said. The brokerage pointed to strong performance in select companies, while others have seen de-rating due to product-specific and pricing pressures.
Capital markets
UBS said the capital markets segment is trading slightly above its long-term average, supported by strong operating performance at exchanges. “The sector’s overall valuation is slightly higher than its long-term average, driven by robust performance of exchanges,” UBS said, adding that Multi Commodity Exchange (MCX) and BSE have re-rated due to strong volume growth.
UBS: Rerating trend in midcaps reversed in 2025
UBS pointed out that while both the Nifty and the Nifty Midcap Index saw PE de-ratings in 2022, the midcap segment witnessed a consistent re-rating in the two years that followed. That trend changed last year. “In 2025, the Midcap index had a de-rating of 11% vs. a 7% re-rating for the Nifty,” UBS said, signalling a relative cooling in midcap valuations.
Conclusion
Valuations of most of these sectors continue to be near long-term averages or slightly higher. According to UBS, a bottom-up or stock-specific approach can help deliver better return prospects