The S&P BSE Smallcap and Midcap indices have rallied nearly 10 per cent so far in 2017 compared with a 5 per cent rise in the S&P BSE Sensex. But many smallcap and midcap stocks have rallied between 40 per cent and 100 per cent in this period.
Stocks that have more than doubled investor wealth in the smallcap space include LT Foods and National Fertilisers, while others like Aegis Logistics, Arshiya, Ruchi Soya, JP Associates, Prakash Industries, Monnet Ispat and Venky’s have risen 50-80 per cent in this period.
In the midcap space, Adani Power, GMR Infra, SAIL, Havells India, Indiabulls Housing Finance, Jindal Steel, Indian Bank, HPCL and Sun TV have risen 20-40 per cent in the same period.
A lot of midcap and smallcap stocks across the board have rallied. In some pockets, valuations do look stretched. But experts say there is nothing to be worried about, and investors who are invested for the long term stand to make handsome gains.
Factors supporting this rally
Govt policy push, India focus: Demonetisation might have added pressure on the economy, but the Union Budget had enough stimulants to boost smallcap and midcap stocks. This is one sector which is not impacted by global headwinds as most of their revenues are India focused, experts said.
Goods & services tax: Many of the smallcap and midcap companies are well placed to benefit from the shift towards organised sector on the back of demonetisation and GST.
EM rally is benefiting broader market: The outperformance of developed markets (DM) over emerging markets (EM) witnessed in November and December 2016 started fizzling out in early 2017. The trend reversal in the dollar index is the primary reason for this.
The EM index is already up 7.6 per cent this year and the Nifty50 has appreciated 7.5 per cent. This means we are participating in the emerging markets rally.
Reasonable valuations: Currently, the valuations of largecap, midcap and smallcap stocks are higher than their historical averages. But one also needs to consider the fact that the cost of capital currently is low relative to history.
SIPs infusing rally: One factor contributing to this outperformance is the sustained inflows into the mid and small cap funds, mainly through the SIP route, suggest experts.