For the first time since 2015, smallcap and midcap investors could lose money in the run up to Diwali. Both, BSE smallcap and the midcap indices have given negative returns in the last one month, making this Diwali lacklustre for these investors.
While BSE midcap index is down 1.1 per cent in the last one month, the smallcap index has posted a negative growth of 2.5 per cent. In contrast, the midcap index was up 5.2 per cent and small cap 4.2 per cent in the Diwali month of 2018. The two figures were last in the negative zone in 2015.
The collective market capitalisation of BSE-B group shares (small and mid caps) was Rs 20 lakh crore in 2017-18 and it fell to Rs 8 lakh crore in September 2019 - almost to the 2009 levels, said G Chokkalingam, Founder, Equinomics Research and Advisory. It has only risen to Rs 10 lakh crore as of Thursday's closing.
"The overall economic slowdown is visible in the mid cap and small cap spaces also. Corporate earnings are not showing encouraging growth, especially in the mid cap and small cap space. Only select large caps are performing and those are the ones where earnings growth is visible," says Siddharth Sedani, Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers.
UR Bhat, Fund Manager, Dalton Capital Advisors says prices of small and mid caps have fallen a lot from their peaks. "They are not as well equipped as large caps to face any adversity in the economy. So they are quoting at a discount now," he says.
The BSE midcap index is currently valued at 27x its underlying earnings in the trailing 12 months, a sharp decline from price-to-earnings multiple of 35x a year ago. In comparison, the benchmark BSE Sensex is trading at 27.3x its trailing earnings. This is first time in over two years that the midcap index is trading at a discount to the benchmark indices that comprise large cap stocks.
Chokkalingam, however, says it is the right time for investors to consider investments in mid and smallcap stocks because of the low valuations. "These stocks have suffered the maximum stress since January 2018 and now there is great opportunity for quality stocks in this space," he says.
Sedani adds that some mid caps are attractive in pockets that are showing value such as those in chemical and oil and gas sectors. "Yet, one has to be very selective in small and mid caps for another six to twelve months."
Chokkalingam suggests applying four filters while investing in mid and small cap stocks - management quality should be good, the companies should have the least amount of leverage, no major pledging by promoters and the scrips should give valuation comfort. "If someone chooses quality stocks based on these filters, it is great opportunity to buy in the space," he adds.