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Avoid Small And Mid Cap Exposure Till Economy Revives

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Avoid Small And Mid Cap Exposure Till Economy Revives
Yagnesh Kansara - 20 December 2019

Mumbai, December 20: The revival of sentiments in the small and mid cap stocks is directly linked to the revival in the economy, which is currently going through a slow down phase. Unless a full fledged recovery is seen in the overall economy, the depressed sentiment in small and mid cap space can not be revived, Kotak Securities said in its report on Outlook for 2020. This is a clear indication to the investors to stay away from these stocks and stay safe until there are signs of the economy picking up.

Jaideep Hansraj, MD and CEO, Kotak Securities, said, “The underperformance of the small cap index relative to the Nifty-50 has come closer to its three previous instances seen in the last 15 years. For the mid and small caps to outperform the large caps, we need a broad recovery in the economy with improved credit off-take, better print of IIP and GDP growth. Hopefully, if the forthcoming Union Budget provides some incentives to taxpayers and investors then we could see a broader rally in the market which could then revive interest in the mid and small cap space.”

The year gone-by has seen the Nifty delivering double-digit returns mainly led by a handful of its constituents. The broader market is still reeling under pressure with both mid and small cap indexes showing negative returns in this calendar year to date.

Hansraj said, “The steep outperformance of the mid and small caps seen between 2014-17, has been completely wiped off. Removing the exuberance of 2017, the Nifty Mid Cap 100 Index is appropriately placed between the previous peaks and lows (in terms of its relative performance vis-à-vis Nifty-50). The Nifty Small Cap 100 Index underperformance relative to Nifty-50 Index has come close to its previous three bottoms seen in last 15 years. The small caps can show material outperformance, if economy revives.”

Based on Bloomberg consensus, Kotak Securities in its presentation, stated, Nifty Mid Cap Forward PE currently stands at 16.3 times (x) against 18.6x of Nifty-50. In Jan’18 the Nifty Mid Cap Index’s Forward PE was trading 550 bps premium over the Forward PE of Nifty-50. In context of Nifty-50, valuations of Mid Caps seem reasonable.

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