After Modi, another ‘M’ readies to spin wealth on D-Street: Midcaps
The latest new buzz on Dalal Street is about an eminent ‘midcap rally.’
The latest new buzz on Dalal Street is about an eminent ‘midcap rally.’ Analysts are citing ‘reasonable valuations,’ a ‘Golden Cross’ on technical charts and historical trends to suggest midcaps are ready to take off and should deliver handsome gains from here on.
The market’s new-found love for midcaps is in contrast with the ‘cautious’ outlook that Dalal Street had had towards them for all of last year.
Flows into domestic mutual funds, usually a key driver of midcaps, should revive as the political uncertainty ends. This, along with the large cash pile domestic funds were sitting on going into the election, should increase flow into midcaps, analysts said.
Such incremental flows would have support from valuations, as Nifty Midcap index now trades at a 19 per cent discount to largecap barometer Nifty50.
“There was a sharp slowdown in local flows, the main driving force, in last six months. We can expect inflows to resume and local investors to take comfort in this space with a 2-3 years’ horizon,” said Kotak Securities.
Technical factors, too, are at play, the biggest being the formation of a ‘Golden Cross’ on midcap index, where the medium-term 50-day moving average has crossed the long-term 200-day moving average, sending out a strong buy signal.
Nifty Midcap index has risen a minimum of 29 per cent in one year after forming a ‘Golden Gross’ since 2006, ICICI Securities said in a note. The strike rate is a healthy 71 per cent. For smallcaps, 37 per cent is the average return observed following this technical phenomenon, with a 100 per cent strike rate!
"We expect midcap and smallcap indices to embark on a fresh bull run with significant upsides and outperform the largecap benchmarks in the coming months," ICICI Securities said.
History favours midcaps, which have never underperformed largecaps for two consecutive years. It last happened in 2014. After 2013’s poor show, the midcap and smallcap indices rallied 54.7 per cent and 69.2 per cent, respectively, in 2014 against a 29.9 per cent surge in BSE Sensex.
Midcaps failed investors in 2018, which brightens their chances of making a comeback in 2019, analysts say.
Historical trend also suggests the broader market usually performs well in the first 12-18 months of a new government.
The midcap index is still down 20 per cent since its January 2018 peak against a 5 per cent rise in Nifty. The midcap gauge is now valued at 14.8 times 12-month forward earnings against 18.3 times forward multiples for Nifty.
“The relative valuation is plunging toward –1 standard deviation level, making midcaps very attractive. This investment thesis is intact and the post-election environment will provide the right platform for an outperformance by midcaps,” Elara Capital said.
Investors who have been waiting on the sidelines for the election uncertainty to go should start investing in midcaps and smallcaps now as they are expected to benefit from a risk-on scenario and lower valuations, said Vivek Ranjan Misra, Head of Fundamental Research at Karvy Stock Broking.