Mumbai: Mid-cap and small-cap stocks led a rebound in Indian stocks on Monday after tensions between North Korea and the US eased with key American officials playing down the risk of an imminent war.

Globally too, following last week’s rout stocks rebounded after the US central intelligence agency’s director Mike Pompeo and national security adviser H.R. McMaster said in separate Sunday talk show appearances that there was no indication war will break out, Bloomberg reported. Stocks in China, South Korea and Hong Kong gained around 1% while markets in France, the UK and Germany also opened firmer.

The BSE mid-cap and small-cap indices gained around 2.5% each on Monday outpacing the benchmark indices. The Sensex gained 235.44 points, or 0.75%, before ending at 31,449.03, its biggest one-day gain since 19 July. The National Stock Exchange’s Nifty closed at 9,794.15 points, up 0.86%.

Analysts said the sharp fall in the mid and small-cap stocks last week was seen as a buying opportunity by investors who were waiting on the sidelines.

“Mid and small cap outperformed the markets as participants used the bargaining opportunity," said Vinod Nair, head of research at Geojit Financial Services Ltd. “Weak US inflation data may influence the Federal Reserve to hold its dovish tone which eventually adds positive vibes to the emerging markets like India."

Last week, mid-cap and small-cap stocks were hit the most, with their benchmark indices falling 4.3% and 5.5% respectively. The Sensex and Nifty fell around 3.5%, their worst weekly performance in 18 months. “Midcaps suffered last week due to the Sebi’s directive on suspected shell companies. However, investors used that as a buying opportunity which have aided the mid-caps rally today," said Kunj Bansal, chief investment officer at Centrum Broking.

To be sure, mid and small-cap stocks have been outperforming the benchmark indices this year despite weak earnings. So far in 2017, the BSE Sensex has rallied 18.1% while the Nifty jumped 19.7%. BSE Mid-cap and BSE Small-cap indices have soared 25.4% and 28%, respectively.

The sharp rise also shows in the comparative valuations. Mid-cap and small-cap indices are at a premium to benchmark indices, trading at 19.2 and 18.4 times their respective one-year ahead earnings. The Sensex trades at a multiple of 18.36 and Nifty at 17.85.

Largely investors look for better growth than valuation comfort. Mid-caps offer better growth than large-cap peers which is why they are more preferred," said Pankaj Pandey, research head at ICICI Securities. He sees more upside to the mid-cap stocks with the upturn in economic growth in India.

Among mid-caps which have done well in 2017 are Jindal Steel & Power Ltd (up 98%), L&T Finance Holdings Ltd (up 97%), Indiabulls Housing Finance Ltd (up 86%), Bajaj Finserv Ltd (up 81%). In the small-cap index, Indiabulls Ventures Ltd (up 832%), Venky’s India Ltd (up 361%) and Avanti Feeds Ltd (up 289%) were top performers this year.