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India’s smallcaps have underperformed while midcaps have held nerve. In a note on the smallcap and midcap strategy, brokerage firm Edelweiss delved into SMID earnings cycle and valuation, and also checked if there has been a big change in mid-cap composition supporting this resilience. 

“Prima facie, mid-cap indices now have 6–10% more non-cyclical stocks than in 2019–15; this, we  think, is still inadequate to avoid SMID mean reversions. Earnings upgrades slowing down, consensus hiding in neutral zone and valuation above LT averages—SMIDs are ripe for more underperformance," the note stated.

The brokerage house has reiterated the shift in stance to structural/quality from cyclicals. Edelweiss' top stock picks are Sapphire, Blue Dart, Varun Bev, Alkem, Greenpanel, IGL, Deepak Nitrite, HCG, Teamlease, Prince Pipes and KEI.

Nifty Smallcap Index (100) has lagged NIFTY by 19% YTD, but Nifty Midcap has been largely keeping up with NIFTY until very recently. This time, apart from other things, Edelweiss analysed if the mid-cap composition has changed meaningfully. 

“During 2009–15, the average share of non-cyclical (structural) stocks in the midcap index (based on FF market cap) was 33%, which grew to an average of 39% during 2016–22. Similarly, from an average of 26 structural stocks during 2009–14, the average for 2016–22 stands at 35 stocks. We believe this degree of shift is inadequate to cause the recent resilience and the real reason lies in the strength of the overall market," it highlighted.

This year has been an anomaly as cyclicals have outperformed, led mainly by domestic cyclicals, however, with expectations running high along with high valuations, the last leg of cyclicals might be behind, in our view, said Edelweiss. It has again recommended a switch to non-cyclicals to structural stocks within SMIDs.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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