As markets gather steam, small, midcaps pip bluechips

Small and midcaps are leading the charge in the latest market rebound.

Since November 21, when the benchmark S&P BSE Sensex and the National Stock Exchange Nifty hit their recent lows and slipped into correction territory, the Nifty Smallcap 100 index has risen by 8 per cent, while the Nifty Midcap 100 has gained 5.7 per cent.

Meanwhile, the Nifty 50 index has risen by 4.7 per cent during this period.

From their recent lows on November 13, the Nifty Smallcap 100 index has gained close to 9 per cent, while the Nifty Midcap 100 has risen by 7 per cent.

The sharper recovery in small and midcaps is due to the continued selloff in the largecap space, mainly by foreign investors.

Experts say that parts of the small and midcap space have turned attractive after the sharp correction over the past two months.

The Indian equity market has seen a selloff since late September, first due to foreign portfolio investors (FPIs) selling after the Chinese government announced a series of measures to revive the economy and equity markets.

A strengthening dollar and rising US bond yields, amidst concerns about the geopolitical and economic implications of Donald Trump's return to the US presidency, prompted FPIs to reduce exposure to emerging markets like India.

A disappointing July-September quarter result further exacerbated the sales.

Notably, the decline in small and midcap indices, even during the correction phase in the market, was less severe than that of the Sensex and Nifty.

From September 26 to November 21, the benchmark Nifty declined by 11 per cent, the Nifty Midcap index fell by 10.1 per cent, and the Nifty Smallcap index fell by 8.6 per cent.

Trump's protectionist policies will strengthen the US dollar and promote more FPI selling going forward. FPI selling is largely concentrated in largecaps.

FPI presence in smallcaps is negligible.

At the same time, retail investors continue to pour into the market despite the selloff, and they focus on small and midcaps,  said Chokkalingam G, founder of Equinomics Research.

Chokkalingam added that better sectoral diversity in the small and midcap space is another reason for investor interest in the segment.

Within the Sensex and Nifty, many sectors are struggling with single-digit profit growth.

However, there are many unique businesses in the small and midcaps, as there are around 4,000 firms in this segment.

There is growth and deep value in pockets.

One is bullish about largecaps in the long term, but for at least a few months, one expects the selloff to continue,  said Chokkalingam.

Some experts are less bullish and warn investors that this outperformance is because markets are bouncing back after entering the correction phase.

A correction phase refers  to a 10 per cent decline from the  recent highs.

Small and midcaps always outperform during a bounce-back.

The macro numbers are still bad. Earnings for the October-December quarter, which will be out next month, are likely to be a disappointment, like those for the July-September quarter.

It's better to utilise this rally to lighten positions, said Ambareesh Baliga, an independent equity analyst.