MUMBAI: Blue-chip stocks in 2018 registered their best-ever outperformance over their mid-cap peers. While the Sensex gained 5.6 per cent during the year till December 19, the BSE mid-cap index fell 14.8 per cent, a near 20 per cent gap in their performance during the year, according to Bloomberg data.
Market participants expect this outperformance of the blue-chip index against midcaps to continue as several smaller stocks are fighting multiple headwinds including stagnant earnings and heightened valuations.
“The correction in the midcap space is not fully done yet. For some midcaps, the growth deceleration and the expectations that are built into them mean that even fundamentally they are unlikely to surprise positively,” said Neelkanth Mishra, India Equity Strategist, Credit Suisse. Mishra added that the drying up of flows in alternative investment funds (AIFs) and portfolio management services is also a negative for the midcaps.
The ongoing crisis in the nonbanking financial companies (NBFCs) is another key headwind for the midcap stocks since many of them rely on funding from NBFCs. Further, most of the listed NBFCs come under the midcap category and have already been battered.
Prior to this, the best outperformance of Sensex with respect to mid-cap index was in 2006 when the blue-chip index rallied 50 per cent while the mid-cap index managed to gain only 34 per cent, data compiled from Bloomberg showed.
The mid-cap stocks have been clear winners since 2014 as the BSE mid-cap index has grown 103 per cent in these five years. On the other hand, Sensex managed to go up by 58 per cent only since 2014. Even at the peak of the bull market in 2017, the BSE Mid-cap index went up by 57 per cent outperforming the 36 per cent gain made by Sensex.
This rally in midcap stocks was on the back of hopes of earnings revival and strong growth potential. However, the underlying fundamentals of these midcap stocks remained weak leading to a sharp surge in the price to earnings multiples of these stocks. At its peak in early 2018, the BSE mid-cap was trading at 65-70 times price to earnings.
Despite the weakness at a segment level, there are still value buying opportunities in the midcap space, say experts. In the year, more than 600 stocks have fallen more than 20 per cent with 200 of them losing over 50 per cent.
“Investors should not base their judgment on momentum in a stock but should consider fundamentals such as management quality, earnings outlook while taking an investment call,” said G Chokkalingam, managing director, Equinomics Research & Advisory.
Typically, mid-cap stocks do better than blue-chip stocks during bull markets as higher risk appetite among investors leads them to invest in riskier assets. The trend was evident in 2005, 2007, 2014 and 2017. On the other hand, large-caps tend to outperform in volatile markets as they offer stability and capital protection for the investors. Such a trend was seen in 2008 and 2013 previously.
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