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Business News/ Markets / Stock Markets/  This is the reason why midcaps and smallcaps may consolidate in medium-term
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This is the reason why midcaps and smallcaps may consolidate in medium-term

We expect the valuation of Mid & Small caps to consolidate in the medium-term in anticipation of a slowdown in earnings growth in FY25, says Vinod Nair, Head of Research, Geojit Financial Services.

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Business Team Investment Entrepreneur Trading discussing and analysis graph stock market trading,stock chart concept

The March clampdown led the broad Midcap and Smallcap indexes to a total fall of -8% and -13%, respectively, from the intraday high to low between 5th to 14th of March. Following the low point reached last Thursday, the market has rebounded, experiencing a gain of around 5% to 7% respectively. The total cut has reduced to -4% and -7%, as of Friday, closing 22nd March.

Technically, the respite rally is led by a reduction in retail selling while FIIs & DIIs have continued their buying. In March, till date, FIIs and MF have brought a total 35,011 cr and 31,195 cr dated 19th March. Furthermore, buying activity has persisted throughout this week, suggesting that institutional investors do not perceive any significant concerns regarding the fallout of domestic momentum.

This trend may be linked to the fact that most corrections have targeted Mid & Smallcaps. Large caps constitute two-thirds of India's total market capitalization, making them the preferred investment choice for long-term institutional investors. MFs are on a buying spree as SIP quantum is at an all-time high. Short-term corrections are the best time to bargain for additional investment. Further, MFs hold diversified portfolios, as evidenced by data from the top 5 mid & small caps schemes, with fair amount of allocations to large-cap, debt, and cash positions, which can be utilized during hawkish trends.

In a departure from the selling observed in January and February, FIIs have transitioned to a buying stance in India during March. The net outflow of 22,111 cr in the preceding two months has been offset by a substantial net inflow of 37,254 cr as of March 20th. FIIs are the highest buyers in India in the Asian region, with total of $ 4252.6 million, as of 20th March. The second best is South Korea, with net inflow of $ 1817.1 million.

The Federal Reserve's policy announcement on Wednesday is expected to buoy emerging markets, reinforcing the positive sentiment in the Indian market driven by FIIs. This is in anticipation that the Fed will start to cut the rate from June-July, regardless of whether the CPI remains above the 2% target for some time. Moreover, core economic indicators signal a robust economy, which is conducive to corporate earnings. The Fed is also planning to reduce the pace of balance sheet reduction. Since the initiation of quantitative tightening last year, nearly $1.5 trillion worth of securities have been sold, which could support liquidity in the system.

The ongoing upside is also underpinned by the traders punting on the stocks to buy when the market is trading at oversold territory, indicating potential in the short term. However, in the medium-term, the Indian market may grapple with a distinctive volatility pattern driven by inflated valuations of mid- and small-cap stocks, election volatility, and moderation in retail inflows. 

We expect the valuation of Mid & Small caps to consolidate in the medium-term in anticipation of a slowdown in earnings growth in FY25. For instance, the Midcap150 index’s EPS (Earnings Per Share) CAGR was 35%. The YoY EPS growth in FY24 is estimated at 30% YoY and is forecast to slow to 20% in FY25. Its health, however, can influence a drop in premiumization. The current one year forward P/E of Nifty Midcap 100 index is at 25x, compared to the long-term average of 21x. 

The author Vinod Nair, is Head of Research, Geojit Financial Services.

Disclaimer: The views and recommendations above are those of individual analysts, experts, and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

 

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Published: 24 Mar 2024, 05:10 PM IST
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