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A lot of mid and small-caps are in the bubble zone and command high valuation and have corrected sharply.
The mid and small-cap indices -- down over 2 per cent each -- have underperformed the benchmark BSE Sensex thus far in calendar year 2022.
The Sensex has slipped 0.2 per cent over this period.
Analysts attribute this to a host of factors, including the overall nervousness in the market, given the multiple headwinds and selling by retail investors who generally prefer to invest in these two segments.
Though from a short-term perspective they remain cautious on the markets, especially these two segments, they believe mid and small-caps will bounce back and will eventually outperform their large-cap peers in 2022.
"Foreign investors have remained on the sidelines and that's why the overall market, especially the large-caps. Retail investors, however, have continued to pour in (as seen from the rise in demat accounts). A lot of them have sold quality mid and small-cap stocks to make up for the losses in other counters," explains G Chokkalingam, founder and chief investment officer at Equinomics Research.
"That said, a lot of mid and small-caps are in the bubble zone and command high valuation and have corrected sharply," Chokkalingam adds.
The fall in some of the stocks from these two segments has been sharper.
Stovekraft, Jubilant Industries, Vodafone India, Vaibhav Global, Sterlite Technologies, Mahindra Logistics, Dr Lal Pathlabs, Radico Khaitan, and Tata Teleservices (Maharashtra) have lost between 20 per cent and 35 per cent during this period.
On the other hand, DB Realty, Gujarat Mineral Development Corporation, TV18 Broadcast, Orient Bell, and Himadri Speciality Chemical have rallied 40 per cent to 161 per cent during this period.
"Though the market movement is difficult to predict at the current juncture, a meaningful correction from here will make a lot of mid and small-caps quite attractive. In this backdrop, there can be value-buying at lower levels which can propel these two market segments higher," says A K Prabhakar, head of research at IDBI Capital.
Chokkalingam believes this underperformance of the mid and small-cap segments may continue for a few more weeks till the excesses are taken out.
Thereafter, he expects them to stage a smart recovery and the overall market sentiment also improves.
"I am still confident that both these segments will do well and will beat their large-cap peers going ahead. There are a lot of small-caps that look very attractive in terms of valuation and should do well in the medium-to-long term," Chokkalingam adds.
From an asset allocation perspective, analysts at Credit Suisse Wealth Management believe equities is still a preferred asset class from a medium-to-long-term perspective.
While faster-than-expected tightening by the US Fed may lead to overall de-rating for global as well as for the Indian equities, they do not expect India's valuation premium to materially de-rate in the near term.
'Given our expectation of higher and faster GDP growth, our preference is for domestic cyclicals such as banks, industrials, and cement companies. We continue to maintain a mild overweight position on mid-caps,' Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, noted in a recent note co-authored with Premal Kamdar.
