Are mid- and small-cap stocks looking better now? Check analysts' views

Stock market today: The SMID (small and midcap) stocks, which came under the scanner after market regulator Sebi in February flagged froth in the segment, have seen bouts of volatility. The small-cap index has seen some corrections since then. 

The S&P BSE SmallCap index has fallen over 4 per cent from its all-time high of 46,821.39, hit on February 7, while the S&P BSE Midcap index has been hovering around all-time highs. 

Source: ZeeBiz research 

Source: ZeeBiz research 

Does the 'bubble' still exist in broader market?

Diwakar Rana, Senior Equity Research Analyst at Prudent Equity, says that froth still exists in certain parts of the market.

"The increase in mid- and small-cap IPOs and the low liquidity have contributed to the bubble in small and mid-cap stocks, particularly in the SME sector," said Rana. 

Echoing a similar view, Pawan Bharaddia, co-founder of Equitree Capital, said froth in valuations was mainly in the SME segment and the larger mid-and small-cap companies, with a broader base of the market trading closer to its long-term averages.

Conversely, Divam Sharma, founder and fund manager at Green Portfolio, sees no froth in the valuations, as according to him, the fundamentals are strong. 

What lies ahead for the broader market? 

Equitree Capital's Bharaddia said that given the recent correction, stability is expected going forward in the broader market, with a further 5–10 per cent correction in the larger mid-and small-cap companies.

Echoing a similar view, Tanvi Kanchan, Head of UAE Business & Strategy at Anand Rathi Shares and Stock Brokers, analysing the historical movement of the market, said such corrections often reverse within the following two months and anticipate a market rebound soon.

Prudent Equity's Rana also said that mid- and small-cap space looks more appealing after correction. 

What should investors do? 

Anand Rathi's Kanchan suggests booking profits in stocks that have experienced significant rallies. She recommends focusing on risk management, diversification, and prioritising higher-quality investments.

Equitree Capital's Bharaddia believes that investors should look at mid- and small-cap space from a long-term perspective, as the short-term volatility is bound to be all-encompassing. 

"Given the upcoming national elections, we believe we may see increased volatility over the next couple of months. We strongly believe that one should look to leverage this volatility to build a portfolio of strong and credible businesses from a longer-term perspective," said Bharaddia. 

Outlook 

Analysts believe action in the mid-and small-cap space going forward will be stock-specific and not broad-based generalisation. 

With businesses slated to grow at a CAGR of 20–25 per cent over the next few years, mid-and small-cap companies should continue to emerge as the biggest wealth creators over time, as per Equitree Capital.

Furthermore, Green Portfolio believes more buying will be seen in companies delivering positive Q4 results. They see an appetite of investors continuing into mid-and small-cap companies.

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