The smallcap index has rallied almost 35 per cent this year and the midcap index 30 per cent. After such stupendous returns, if you still think that it is going to give similar returns in the near future, you maybe wrong.
Valuations in small and midcap stocks are no longer reasonable. Some analysts argue that they have reached bubble levels, while others think they are almost there.
Very few would argue that small and midcap stocks are reasonably priced. Having said that, you would always get a few stocks, in fact, very few stocks at reasonable valuations.
However, in today's market, you would find even that extremely difficult. The current price to earnings of the small cap and mid cap index ranges from 22 to 25, which is rather high.
Way higher than benchmark indices
The Sensex 1-year forward p/e is around 20 times, which is much lower than that of midcap and small cap stocks. On Monday, the benchmark indices were higher, while midcap and small cap index dropped marginally.
It is a clear sign that fatigue has stepped in and even mutual funds have now turned weary of buying. Clearly, the run-up in these stocks was largely to do from the huge appetite that small and mid cap funds had, because of the huge cash flows into these funds.
However, at some stage they would have to discern over valuations.
Large cap stocks may provide better hedge
In the event of a market meltdown, largecap stocks would be able to protect capital erosion far better than small and midcap stocks.
It may hence be time to at least partially book profits from and small cap stocks after a staggering 30 and 35 per cent rally. Stocks could always offer you better price points in the future.