Teji Mandi Explains: Mid and Small Cap enjoy an extended dream run on D-Street

Recent dream run in the mid & small-cap space has created many records. In the last 13 months, the NSE Midcap 100 has achieved positive monthly returns of 102%. This is the best performance on a consecutive months basis for the NSE Midcap 100.

NSE Smallcap 100 is also not too far. It has delivered positive monthly returns of 67% in the last eight months. It is the second-best performance for the index in terms of consecutive months of positive returns.

While NSE Smallcap 100 has outperformed Nifty in 10 out of 12 months, NSE Midcap 100 index has managed to do so in nine out of the last 12 months.

This is the highest level of performance in the mid-small cap space since the great financial crisis.

Despite these recent sharp gains, the NSE Midcap 100 and NSE Smallcap 100 indices have underperformed the Nifty since December 2017. The Nifty has gained 51% since its last peak in December 2017, while the NSE Midcap 100 has delivered 28% returns, NSE Smallcap 100 have delivered 6% returns since their peak in December 2017.

Sharp Rise in Market-Cap Contribution

The recent broad-based rally has led to a sharp increase in the m-cap contribution of midcap and smallcap stocks. In terms of absolute m-cap, NSE Midcap 100/NSE Smallcap 100 are at the highest ever levels with Rs 28 lakh crore and Rs 8.5 lakh crore, respectively.

In percentage terms, though, it is still a long way from its peak. NSE Midcap 100 index now contributes 12.1% to the overall market cap, down from its peak contribution of 17.4%. As for small-caps, their contribution as a percentage of overall m-cap is at 3.7% at present. It is down from its peak level of 4%.

Will the Outperformance Sustain?

Healthy earnings, improving sentiments, benign liquidity, and low cost of capital have all helped midcaps outperform. It has more than bridge the valuation gap v/s large-caps, and the risk-reward ratio in small-mid caps is not favourable anymore.

Gradual unlocking of the economy has opened up a possibility of a long upcycle in mid-small cap space. However, consistent earning delivery v/s expectations will be critical for further outperformance.

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