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MOSL: INDIA STRATEGY: Midcaps hit a home run! Several benchmarks being reset; risk-reward metric not lucrative

India Strategy: Midcaps hit a home run! Several benchmarks being reset; risk-reward metric not lucrative

 

• The outperformance of midcap and smallcap indices have gone past their earlier benchmarks on multiple fronts - consecutive months of positive returns, 12-month rolling returns gap v/s the Nifty, relative valuations, and contribution to overall market capitalization.
• There exists a sharp divergence in valuations within these indices, with the gap between the top and bottom quintile expanding.
• While the midcap/smallcap valuations are rich and no longer lucrative on the risk-reward metric, the gradual unlocking of the economy and improved demand backdrop still offer bottom-up opportunities. Consistent earnings delivery v/s expectations is critical for further outperformance in our view.

 Long stretch of monthly positive returns in midcap/smallcap indices

• The recent sharp gains in midcap and smallcap indices have created new benchmarks.
• The NSE Midcap 100/NSE Smallcap 100 indices have generated consecutive positive monthly returns of 102%/67% in the last 13 months/8 months. This is the best such period of consecutive months of positive returns for the NSE Midcap 100. The Nifty Smallcap 100 has bettered this only once in the past.
• The NSE Smallcap 100/NSE Midcap 100 index has outperformed the Nifty in 10/9 out of 12 months.
• Nifty’s underperformance v/s the midcap index on a 12-month rolling basis is at the highest levels since the GFC. For the smallcap index, this rolling 12 months underperformance is at the same level as during the GFC.
• Despite these recent sharp gains, the NSE Midcap 100 and NSE Smallcap 100 indices have underperformed the Nifty since their previous peaks of Dec’17. The Nifty has gained 51% since Dec’17, while the NSE Midcap 100/NSE Smallcap 100 have returned 28%/6%.