Midcaps are likely to underperform in 2023, says Nuwama

Going forward, brokerage house Nuwama expects both midcaps and smallcaps (SMIDs) to underperform benchmarks in 2023 on the back of broad downgrades.

The report said, “We expect earnings to decline.

Midcap in 2023

According to the brokerage, market share consolidation and shift from unorganized to organized has been a major market theme in the last five years. Nuwama said midcaps have benefited more than largecaps from this change as even small changes in their market share can lead to strong demand and a jump in profits. However, the environment is changing now with the market share shrinking and liquidity tight. This usually hurts listed companies; Within this, small and inefficient ones abound, the brokerage pointed out.

In 2022, domestic growth stalled despite a global recession. This is the main reason why domestic-oriented midcaps have outperformed global ones and have provided better earnings trajectory, the brokerage explained.

However, going forward, challenges are likely to remain in 2023. Nuwama said there is a risk pivot from de-rating to downgrade, which will weigh on midcaps.

Most experts advise investors to pick stocks after a thorough analysis of the company’s financials and its industry position. They recommend choosing quality stocks which are available at reasonable valuations irrespective of their market capitalization.

It is important to note that while midcaps and smallcaps can at times give better returns than largecaps, they also come with extremely high risk. Investors with a risk appetite should stay away from such stocks or invest only a small portion of their portfolio in them. Such stocks are more suited for high risk appetite investors. You should always consult your financial advisor before making any investment decision.