Chart Beat: Small stocks no longer beautiful?

Midcaps and smallcap stocks have been outperforming larger peers, but investors must exercise caution, as a correction cannot be ruled out. (Image: Pixabay)
Midcaps and smallcap stocks have been outperforming larger peers, but investors must exercise caution, as a correction cannot be ruled out. (Image: Pixabay)

Summary

  • A key concern here is that most of the mid- and small-cap stocks may have run ahead of their fundamentals

Mid- and small-cap stocks have been outperforming larger peers, although returns have moderated a bit recently. Over the past year, benchmark indices BSE Sensex and Nifty50 have risen approximately 6% and 7%, as per data from brokerage Prabhudas Lilladher. During the same period, the BSE Midcap and BSE Smallcap indices surged by 32% and 37%, showcasing more robust growth. However, in the last quarter, the margin of growth has lessened, with the BSE Midcap and BSE Smallcap indices climbing about 8% and 9%, in contrast to the more modest gains of 2% and 3% in the Sensex and Nifty50.

(Graphics: Mint)
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(Graphics: Mint)

A key concern here is that most of the mid- and small-cap stocks may have run ahead of their fundamentals. Therefore, sustaining the outperformance would hinge on earnings improvement, going ahead. Further, in the run-up to the general elections, scheduled for 2024, if the upbeat market sentiment takes a turn, steeper correction in these stocks cannot be ruled out.

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