This will be a much better year for small-caps and mid-caps and they will outperform the large-cap stocks by a decent margin, said Jyotivardhan Jaipuria, founder & managing director of Valentis Advisors on Monday.
Jaipuria told CNBCTV18 that smallcap and mid-cap shares were trading at 25 percent discount to the large-caps. In the last 15 years, this was among the largest discounts seen in small-caps and mid-caps, he said. Therefore, valuations were tilted in favour of small-caps and mid-caps now, he added.
“The large-caps have outperformed in the last 2 years by wide margin. So, even performances probably requires catchup from small and mid-caps. Small and midcaps do well when the economy recovers."
Last year turned out to be a year where the economy kept sliding down. The economy has started to see some greenshoots. Even though things were not recovering sharply, they have started stabilising at a lower level and moving up from that level, Jaipuria explained.
When asked about Nifty earnings, he said, “Earnings growth has been poor. Earnings growth has not been very exciting whether its large-caps or small-caps.”
“What helped the large-cap earnings growth was a couple of these sectors where the corporate banks which provided a boost to large-cap Nifty earnings or Sensex earnings, if we look at it. So, if we look at Nifty earnings ex the corporate banks and we look at small-cap or mid-cap universe then I would both were equally disappointing rather than equally encouraging,” he further added.
The Indian stock market has been volatile over the last couple of years. While the large cap indices (mainly 15 odd stocks) have ensured low but positive double-digit returns, the mid and small cap indices have had a rough time.
MSCI India Mid Cap index, constituting 27 quality Companies, delivered negative returns of 7.70 percent in CY2019 and 11.66 percent in CY2018. This was a far cry from the 47.12 percent returns delivered in CY2017 – moving from highly optimistic scenario to the currently prevailing pessimistic setting, said Tejas Khoday, CEO and co-founder of broker FYERS.
There are many reasons for this divergence; state of the economy, business demand, falling credit growth, waning consumption, aided by corporate defaults, management, governance and regulatory issues contributing to the shift of investor sentiment from mid-caps to large-caps over the past two years, he said.
Khoday said: "But this divergence is not expected to last long, as valuations of large cap stocks have moved into overvalued territory. Investors are looking for good quality mid-cap stocks, which offer valuation comfort. To provide impetus, improvement in economy is essential along with a receding risk aversion."
While it was too early to say that the mid-cap stocks have bottomed out, there were opportunities which will reward the investors with a horizon of 2 years or more, he said.