Capture big gains in small size: Small and midcaps outperform in 2020, expected to continue in 2021

Small and midcap stocks have outperformed frontline indices in the year 2020 amidst Covid-19 pandemic and is expected to continue with its outperformance is 2021 as well, suggest experts.

After two years of underperformance, small and midcaps came back in limelight this year. Not just Indian investors but foreign investors (FIIs) are also looking to capture big gains in small sizes.

Mid-cap companies are those with capitalization between 2-10 billion dollars, while small-cap corporations have between 300 million – 2 billion dollars.

One big reason for the outperformance of the small and midcap stocks, is the valuations and with the economy bouncing back, broader market could deliver big gains.

Experts suggest that the strategy should be to allocate money in quality small and midcap stocks which could rise in value as the economy rises. 

Another big factors which is fuelling the optimism in the small and midcap space is the September quarter earnings. India Inc. did manage to surprise the analysts’ community and strong management commentary suggests that worst is behind us.

IT and Healthcare as well as Realty were the top sectors that closed with gains of more than 5 percent in mid September.

As many as 96 stocks in the S&P BSE Smallcap index which rallied 10-40 percent in the last five trading sessions. These include Intellect Design, Avanti Feeds, Tata Investment, IOL Chemicals, Cyient, Deepak Nitrite, VIP Industries and Syngene International.

The September 30, 2020 quarter results beat consensus forecasts for most small and midcap (SMID) stocks, according to analyst commentary. Edelweiss Securities in a report highlighted that the Street was very cautious by Q1-end and then the recovery turning out to be sharper than expected.

‘Importantly, Q2 earnings and accompanying management commentary has led to strong upgrades in FY22 estimates. Consensus continues to play catch-up in this recovery,’ added the report.

The recent SEBI guidelines on the Multicap funds have opened room for more money to flow into smallcap space which remains underweight in most mutual fund portfolios.

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