INSUBCONTINENT EXCLUSIVE:
By Pankaj TibrewalOver the past 18 months, midcap and smallcap indices have seen sharp pullbacks
While Nifty is hovering near its all-time high, the midcap index is 23 per cent below its all-time high and the smallcap index 40 per
cent.
There has seen a sharp underperformance of the broader market vis-a-vis Nifty50
Since last 22 months, in the universe of around 1,050 companies (those with market-cap above Rs 500 crore), the aggregate marketcap has
When we analyse in greater detail, we see that the market-cap shift has happened from microcaps, smallcaps and midcaps segments towards the
largecap segment.
In this period, 84 per cent of these 1,050 companies have lost value and merely 16 per cent of them have given positive
Of that, around 40 per cent companies have lost nearly 50 per cent of value.
The current divergence between the performance of largecaps and
mid and smallcaps is at historical extremes
Relative valuations of midcaps and smallcaps vis-a-vis Nifty50 has corrected back to the 2014 lows.
Post the sharp correction, CNX Midcap
100 market-cap has corrected back to the December, 2014 levels
History suggests such divergences do not exist for too long and post such large underperformance, mid and smallcaps tend to outperform the
largecaps over 12-18 months.
The NSE Smallcap 100 Index is now at a level when Nifty was around 9,000 level
and concern on the Street regarding the market outlook, especially regarding midcaps and smallcaps
But this is not the first time we have seen this
We have seen these phases, these moods before
Smallcap Index corrected sharply in 5-6 weeks on valuation concerns and margin selling
However, the index recovered back to the 2006 highs in six to eight months
Most of the concerns then eased and the belief was back.
In 2007, the smallcap index rose from its March 2007 low and moved 135 per cent in
just 10 months and corrected sharply post that during the 2008-09 Lehman crisis
However, the smallcap index rose 290% from the lows in just 18-20 months.
In 2011, we again saw the pain when smallcaps corrected around 50
per cent in 12-14 months and the pain continued till 2013
We saw a sharp rally from August, 2013 where the smallcap index went up by more than 100 per cent in next 9-10 months.
Today, we are again
back to that bear sentiment of disliking midcaps and smallcaps
average fallen 35 per cent
Moreover, if the history is anything to go by, whenever there has been a bad year for smallcaps and midcaps, it has usually been followed by
This has happened multiple times in the past and it remains to be seen if the trend repeats this time around.
From a medium- to long-term
led by recent reforms like GST, RERA and the Insolvency and Bankruptcy Code
Each of these reforms would go a long way in improving the growth rate of the economy in the coming years.
Today our GDP is around $2.5
trillion and we would be a $5 trillion GDP in next 7-8 years
China took five years, US took 11 years and Japan took 8.5 years in the journey from $2 trillion to $5 trillion GDP
In India, this journey would expand the size of the formal economy multi-fold and will allow many midsized businesses to grow and multiply
profits in 5-7 years.
Many domestic economy-oriented sectors today are represented by companies in the midcap and smallcap segments only,
like consumer discretionary, wellness, capital goods, infrastructure, cement, pipes, auto ancillaries and agro-chemicals; and in order to
segment remains under-researched and under-covered, there is potential for significant alpha generation
Within the smallcap space, there is a high return dispersion among stocks, which creates scope for active stock picking
(Pankaj Tibrewal is SVP and Equity Portfolio Manager at Kotak Mutual Fund
