Home >Markets >Stock Markets >Smallcap stocks are shining. But experts caution against a 'disturbing aspect'

The broader market has been outperforming benchmark significantly as mid and small cap stocks have been witnessing strong buying action in the recent market rally. The Nifty Midcap is up by around 26% & Smallcap index by around 33% this year respectively while the benchmark Nifty index is up 12% year-to-date (YTD).

The active retail participation has also significantly contributed to the theme. "Two features of the market rally this year stand out: One, the rally has been steady with surprising lack of volatility; two, the broader market has been outperforming significantly,’’ Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.

However, with the strong performance and investors interest in the space, experts suggest that investors have to exercise caution while picking small-cap stocks. ''The spectacular performance of many mid-small-cap firms in Q4FY21 and positive commentaries by managements have created lot of interest in these segments. A disturbing aspect in this broader market rally is the retail investors buying low-grade small-cap stocks driven by the FOMO (Fear Of Missing Out) factor. Investors have to exercise caution,’’ Vijayakumar added.

Over the last 12 months, midcaps are up 94% against a 63% rise for the Nifty whereas smallcaps have rallied over 100% during the period. PSU Banks, media, utilities, capital goods, oil and gas were the top performers in the month of May.

With the number of active covid cases going down and as states ease restrictions gradually in June, Motilal Oswal Financial Services expects the demand environment to get better. ''However, after the recent run-up, the Nifty now trades at rich valuations of 17.9x FY23 EPS. Thus, any misses in the FY22E earnings delivery may act as a dampener,’’ the brokerage added.

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