InvestorQ : What explains the sudden interest and the recent gains in a number of mid cap stocks in the Indian markets?
Dilmini Mercia made post

What explains the sudden interest and the recent gains in a number of mid cap stocks in the Indian markets?

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Dawn Cherian answered.
1 month ago
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Small- and mid-cap stocks are seeing a sudden revival of interest across the board. In the aftermath of the pandemic, most analysts had written off the small and mid caps as they would take years to recover from the effects of the pandemic. However, they have provide to the stars of the market showing a tremendous recovery and performance.

Nifty Mid-cap 100 and Small-cap 100 zoomed past the large indices gaining 18% and 15% respectively in 2020 year-to-date. In fact, companies with a market cap of less than Rs.1000 crore have gained around 33%. In comparison, companies with market cap over Rs.1 trillion have only gained 11%.

The inclusion of several mid-cap stocks in some of the benchmark MSCI indices has implied global flows into these stocks. MSCI indices continue to be the veritable benchmarks for most of the passive flows by index funds and ETF flows. In addition, the sharp rise in small stocks can also be attributed partially to retail speculative activity.

Companies have admitted that the rural India has shown greater resilience than urban India and most of these small and mid caps earnings have been supported by the rural recovery. In addition, low oil prices and a stable rupee have also helped these mid-sized companies. Most of these mid caps were also low on leverage and that helped recover faster.

However, there is concern beginning to build up now. Mid cap stock valuations are now at a premium of 10% to large caps, and it was almost at par some 1 month ago. Incidentally if Q2 was about cost cuts, then Q3 and Q4 could be about sales growth. In that scenario, mid caps and small-caps have more to gain as themes like PLI and digitization emerge.

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