Mid and small cap stocks have delivered hefty returns in 2017 in comparison to its benchmark indices. But, the trend reversed in 2018, while the Sensex managed to rise 6.20 per cent, mid and small cap indices gave up most of their gains, declining 13.50 per cent and 24 per cent, respectively, due to various underlying problems such as depreciation of the Indian rupee in terms of the US dollar, widening trade deficit, rising of crude oil price, escalating trade tension, slowing global growth and rising US treasury bond yields.
A substantial gain took place in Sensex due to supportive global markets and election optimism, during the month of March, 2019. Experts say the US Federal Reserve’s decision to put interest rate hikes on hold also was behind the latest impetus towards the equities.
There is a positive sentiment in the current market, due to cross-border action by the Government, control of inflation, expectation of a rate cut by RBI, strengthening of Indian Rupee, considerable inflow of FII and US -China trade tension has abated, as the former moderating its stance.
Besides, experts believe that the market have started anticipating a better performance of the ruling NDA government in the upcoming general elections, which help improve market sentiments and develop retail participation in the capital market. On the other hand, global investors remained jittery over uncertainty about Brexit.
The macro-economic data has not improved substantially. The earnings growth is a function of nominal GDP growth, which has been moderating in the last few years. A quick revival of earnings also does not seem in the present situations. Although the major reforms have been already implemented in the last four years and this will definitely boost the growth in the forthcoming years provided that other economic factors improve including CAD and inflation is under control.
It is a great opportunity for investors to invest in selected quality mid and small cap stocks as they are of reasonable value in comparison to their large cap peers because of last year’s high correction in the market. Typically, the large institutional investors have not bought mid and small cap stocks. They are bought more by retail and high net worth investors and also mutual funds.
In the current market scenario, the mid-cap stock will generate more returns than the large cap stocks. Quality and reputed, mid and small cap Companies’ leadership in their categories available with reasonable valuations in the current market, will turn out to be multi- baggers in your portfolios in the long-term.
It is the time for you to analyse and reboot your portfolios by investing in fundamental mid and small cap stocks having true value (intrinsic value) only if you have a long-term horizon and a definite goal.
R K Mohapatra is AGM/Finance in IRCON and an Eminent Author.