Midcaps, Smallcap Indices Hit Lifetime High, Nifty Midcap Over 40K Mark; What Should Investors Do?

Midcap and smallcap indices on BSE and NSE have extended their lifetime high, giving double-digit returns so far in 2023. On September 6, Nifty Midcap 100 which breached over 40,000 mark this week, touched a new all-time high of 40,377.30, while Smallcap 100 index clocked a record high of 12,721.45.

Experts believe that the stellar surge in midcap and small-caps is because they're more closely tied to economic growth. Also, Portfolio Management Services (PMS), High Net Worth Individual (HNI) investments, and innovative products like Smallcase have shown likeness to these stocks. Going forward, midcaps and small-caps remain appealing.

On Wednesday, the Nifty Midcap 100 index settled at 40,284.10, after hitting a new all-time high of 40,377.30, while Nifty Smallcap 100 index surged to end at 12,674.90 after touching a new lifetime high of 12,721.45. Similar was the case with BSE Midcap and Smallcap indexes which touched a new historic high of 32,182.66 and 38,142.34 respectively.

Explaining the strong bullish performance, Arvinder Singh Nanda, Senior Vice President, Master Capital Services highlighted that the Nifty Midcap index crosses the psychological 40,000 mark, gaining nearly 35% in the last six months, while the smallcap index soars above the 12,000 mark to capture around 40% gain since March 2023.

Also, Parth Nyati, Founder of Tradingo pointed out that the midcap segment is experiencing a significant upswing due to several key factors. Foremost among these is the robust economic outlook in India, which is fueling investor optimism. This positive sentiment is further amplified by a substantial influx of domestic liquidity actively seeking opportunities in the market. Notably, midcap and smallcap mutual funds are currently witnessing a surge in inflows as investors flock to these segments. Moreover, Portfolio Management Services (PMS), High Net Worth Individual (HNI) investments, and innovative products like Smallcase are all contributing to the growing momentum in the midcap and smallcap space.

Will the Bulls still favour midcap and small-caps ahead?

Vinod Nair, Head of Research at Geojit Financial Services said, "We believe that the valuation of Mid & Smallcaps remains appealing when compared to the trends of the past seven years. Specifically, Smallcaps appear to be even more attractive than Midcaps in the current scenario. However, considering the overall market consolidation, it's not an ideal environment for investing in high-risk categories, leading to mixed opinions. Our view is that India is now more of a stock-to-sector play. We anticipate that the category as a whole will outperform in the medium to long term. Although there has been strong performance in the short term by Mid & Smallcaps, sustaining this in the near term may pose a challenge."

Meanwhile, Nanda said, despite this humongous gain in prices in such a short span of time, we are still more optimistic about both indexes as growing risk appetency will continue to buoy both segments. Following the improving economic health and domestic developments, investors turned to midcap and smallcap stocks as they are often more closely tied to economic growth than large-cap stocks and offer lucrative returns. Apart from that, improving liquidity in these stocks further fuels investor's confidence to invest more in midcap and smallcap sectors.

What should investors do?

As per Nyati, the broader market currently exhibits signs of being overheated, with a limited margin of safety in the short term. This heightened risk is underscored by the fact that any negative catalyst could potentially trigger significant profit-taking. It's noteworthy that the market appears to be disregarding the adverse impact of a weak monsoon at the moment.

Furthermore, Nyati added that numerous stocks are trading at significantly elevated valuations compared to their historical averages. Consequently, investors would be prudent to exercise caution in the near term, as these elevated valuations could make them susceptible to market corrections.

Nevertheless, Tradingo's founder said, "It's important to maintain a long-term perspective, as the overall outlook remains optimistic. While the short-term environment may be characterized by volatility and potential downside risks, the fundamentals supporting the market's growth potential over the long run remain intact. Therefore, strategic investors should continue to focus on their long-term investment objectives while staying vigilant in the current market conditions."

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.