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Catch me, if you can! A melt-up is brewing in small, midcap stocks – Economic Times

MUMBAI: After a marked underperformance in August, the broader market took over the leadership of the ongoing bull market in Indian equities in September. Both Nifty Midcap100 and Nifty Smallcap100 indiced ended the month at their lifetime highs and outperformed the Nifty50 index.

However, the scintillating gains in the smallcap and midcap space has led some to become cautious, as the benchmarks for the respective segments have nearly tripled in 18 months after hitting their multi-year lows in the crash of March 2020.

Vinit Sambre, head of equities and fund manager at DSP Mutual Fund, recently told ETNow that there is merit to reallocating a part of exposure to smallcap and midcap stocks towards largecap stocks. “There is a bit of a speculative element, which has led to the accumulation of some froth,” he said.

As a collective, smallcap and midcap stocks are not yet quoting valuations seen in the euphoria of 2017, when domestic mutual funds loaded with cash post demonetisation chased world-beating returns in the darkest alleys of the equity market. In comparison, the Nifty50 index is now quoting one-year forward price-to-earnings multiple of 24 times, which is two standard deviations above its historical average.

Another metric that is critical to evaluating how far the rally in the smallcap and midcap segments can go is the ratio of the market capitalisation of BSE Sensex to the market capitalisation of all BSE-listed stocks. According to brokerage firm Prabhudas Lilladher, there is cause for extreme caution in the broader market, when this ratio dips below the 40 per cent mark.

As of Tuesday, the ratio of BSE Sensex’s market-cap to-BSE’s overall market-cap stood at around 44 per cent, 400 basis points above the critical threshold mentioned by brokerage. “This means we might see some more outperformance in midcaps relative to largecaps, if the rally in equities continues,” Prabhudas Lilladher said.

Technical analysts are of the view that Nifty Midcap 100 index is currently displaying the most strength among the major benchmark indices in India. While the index’s relative strength index is currently around 82, it is some distance away from the record high of 90 hit in 2007.

“There is still a lot of headroom available for midcaps, and I don’t see much weakness in the smallcap index either,” said Sacchitanand Uttekar, head of research at Tradebulls Securities.

Uttekar said if Nifty Smallcap 100 index breezes past its resistance at 11,400 level, it could sit at 13,600 level in a blink of an eye. If Uttekar’s prediction were to come true, that would imply gains of 22 per cent from current levels.