India’s smallcaps have underperformed while midcaps have kept their nerves. In a note on smallcap and midcap strategy, brokerage firm Edelweiss delved into the SMID earnings cycle and valuation, and also examined whether there have been any major changes in the mid-cap structure supporting this flexibility.
“Prima facie, mid-cap indices now hold 6-10% more non-cyclical stocks than in 2019-15; This, we think, is still insufficient to avoid SMID mean reversion. Earnings upgrades are slowing, consensus lurks in neutral territory and valuations above LT averages – SMIDs are ripe for more underperformance,” the note said.
The brokerage house reiterated the shift in stance from cyclical to structural/quality. Edelweiss’ top stock picks Sapphire, Blue Dart, Varun Bev, Alkem, Greenpanel, IGL, Deepak Nitrite, HCG, Teamlease, Prince Pipes and KEI.
Nifty Smallcap Index (100) has lagged 19% YTD from Nifty, but Nifty Midcap has largely been keeping up with Nifty till recently. This time, among other things, Edelweiss analyzed whether the mid-cap composition has changed meaningfully.
“During 2009-15, the average share of non-cyclical (structural) stocks in the midcap index (based on FF market cap) was 33%, which increased to an average of 39% during 2016-22. Similarly, from an average of 26 structural stocks during 2009-14, the average for 2016-22 is 35 stocks. We believe this degree of change has been insufficient to generate recent resilience and the real reason lies in the strength of the overall market.”
Edelweiss said this year has been an anomaly as cyclicals have outperformed mainly led by domestic cyclicals, however, with high valuations coupled with high expectations, the last phase of cyclicals may be behind. It has again recommended switching from non-cyclical to structural stocks within the SMID.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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