“I get knocked down, but I get up again.. You are never gonna keep me down.”
This song by the British alternative band Chumbawamba from the 1990s feels like it was written keeping in mind smallcap and midcap stocks only!
The HDFC securities Research team analysed small & midcap stock performance for the last 15 years – and contrary to popular belief, they found only 4 instances when midcap and smallcap indices declined in a year.
And in all four instances, these indices bounced back with a vengeance in the very next year. Midcap and smallcap indices fell by 15% and 29% last year. If history is any guide, these stocks are primed for a major bounce-back.
Smaller stocks had a stellar run in 2017. Notably, the Nifty midcap and smallcap indices delivered 47% and 57% returns as compared to the Nifty’s 29% return in that year. As a consequence, P/E valuation premium of midcaps vs. large-caps reached 46% in March 2018. However, after the correction in midcaps, the P/E premium has now corrected significantly now stands at 10% only.
2018 was a very difficult time for the investors to buy and remain invested in these stocks throughout the last year, which is why these stocks have become highly under-owned now. Mutual Fund reclassification also contributed to the massacre in the smaller stocks, as all funds flushed out excess smallcaps simultaneously from their portfolios. Fast forward to August 2019, and now these segments are merely playing catch up. There is frenzied buying in the smaller stocks as these have seen the deepest decline last year.
There are global headwinds as well, with the slowing world economy likely to push central bankers to reverse their tightening stance and think of stimulating the economy by unleashing liquidity. We feel this liquidity will find its way into India, especially once the election related doubts fade away. In fact, we are already witnessing the foreigners buying heavily into our markets.
Foreign portfolio investors were net sellers in 2018 and also in January 2019 but have become net buyers since February 2019, pumping in billions of dollars in Indian markets markets in 2019. The HDFC securities Research team believes that it is as good as any time to add small and mid-cap stocks to your portfolio.
Small cap index and midcap indices are still lower by ~30% and ~20% from their respective highs seen in 2018. We are sure that these indices are not only going to claw back to their old highs but trade much higher levels in times to come.
Which is why we’re delighted to bring to you the HDFC Small Wonders smallcase, which has been specifically designed to help you gain exposure to the fascinating & rewarding world of smallcap and midcap stocks. The portfolio includes some of our top picks like Everest Industries, Nucleus Software, and Radico Khaitan. In order to diversify & balance risk, 25% of the portfolio is invested in LiquidBeEs that generates fixed income, and the remainder is distributed in an equi-weighted manner across 15 stocks.
To read the detailed fundamental research on each of the single stocks, please click here.
HDFC securities launched smallcases in November 2018. smallcases are portfolios of stocks/ETFs that have an underlying theme or an established investing strategy. smallcases are inherently diversified, have no additional cost other than the standard brokerage, and prove to be far more cost-efficient than mutual funds in the long-run. Login now with your HDFC Securities account to invest in smallcases.
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