NEW DELHI: While the benchmark equity indices swing like a pendulum, the party continues in the broader market.

Nifty Smallcap Index is up over 45 per cent in last six months and the midcap index, over 33 per cent. Nifty, on the other hand, has gained just about 16 per cent for this period.

In the trailing 12-month period, the Smallcap Index had jumped 125 per cent, compared with 91 per cent gain in the midcap index and 63 per cent in blue chip Nifty50.

While the demand outlook remains cloudy for the next 1-2 quarters due to the second wave of Covid-19, FIIs are pulling money out of largecaps, making them more volatile.

“Investors always chase momentum. Smallcaps and midcaps are offering multiple times higher growth and, hence, money is moving into these stocks. It does not take much liquidity for these stocks to go up,” explains Samit Vartak, SageOne Investment Advisors.

Harshad Patwardhan, CIO for Equities at Edelweiss AMC, recalls that in the last 20 years, 2018 and 2019 were the worst years for the midcaps compared with their largecap peers. There will be an adjustment for that now.

“Secondly, a broad-based recovery after the Indian economy bottomed out in June last year has benefited well-run smallcap and midcap firms. Thirdly, if you look at the history of the last 20 years, midcaps tend to do better than largecaps,” Patwardhan said.

Sunil Subramaniam, MD & CEO of Sundaram Mutual Fund, said largecaps have been volatile because of drawdowns by overseas investors. FPIs have pulled out Rs 6,452 crore from Dalal Street so far this month.

He advised investors to shift allocation from smallcaps to midcaps. “Midcaps are more balanced in terms of exposure to sectors, while smallcaps have high exposure to industrials… midcaps are in a sweet spot now,” he said.

In terms of 12-month forward valuations, the midcap index is still trading at a 10% discount to the largecap index, Motilal Oswal pointed out in a report. Although midcaps have outperformed Nifty in the last 12 months by a wide margin, yet on a five-year scale, it seems to be enjoying an edge.

Patwardhan says one fundamental reason behind the outperformance of smallcaps and midcaps is that they are more likely to be under-researched or unresearched by Dalal Street analysts.

“Midcap investors benefit both from growth as well as re-rating. If you have a long-term horizon and can stomach volatility, then chances are that you will make more money in midcaps and smallcaps than largecaps,” he said.

In the Nifty Midcap100 index, stocks like

, Tata Elxsi, SAIL, Dixon Tech, JSPL and Dalmia Bharat have risen up to 440 per cent in the last one year.

Vinit Sambre, Head of Equities at DSP Mutual Fund, however, warned that a retail frenzy might be building up in the broader market, similar to the one we saw at the end of 2017 when even some poor quality stocks had run up feverishly. “We would want to wait for reasonable price points to enter midcaps. The long-term view remains positive,” he said.

Independent market analyst Anand Tandon said even the slightest sign of liquidity easing out from the market can puncture the rally in midcap and smallcap stocks. “The exit door is very narrow. If too many people start exiting at the same time, then it will leave a painful scar on many,” he said.

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