While the current year has seen the benchmark indices — Sensex and Nifty — touch record levels, the coming year could see the side counters finally coming into the limelight after staying low for two consecutive years.
Most market participants are ready to bet on mid-cap and small-cap stocks at a time when the surge in the benchmarks have been witnessed amid weak macroeconomic factors, including growth numbers at multi-year lows.
“Valuations have turned expensive thanks to the recent run-up in equities making the time ripe for increasing allocation in quality mid-cap companies,” said Sharekhan, in its outlook report for 2020.
“After the recent run-up, the benchmark indices are not cheap any more and India trades at substantial premium to the MSCI Emerging Market Index. Consequently, there is a case for increasing allocation in quality mid-cap companies for relatively better returns in the next 12-24 months,” it added.
While the 30-share Sensex has gained nearly 15% in the current calendar year till date, the BSE Midcap and BSE Smallcap indices have fallen 4% and 9% respectively.
A similar trend was seen in 2018 when the Sensex gained nearly 6% and the broader indices lost between 13% and 24%.
“The valuation risk should not divert us from the core bottom-up issue in India, however — that of sharp polarisation in valuations between ‘high-quality’ stocks and the rest — reflected in the huge valuation discount that Indian small-caps are trading at,” highlighted BNP Paribas in its outlook report for 2020.
‘Sensex may hit 44,500’
The French financial major is currently overweight on India and has a target of 44,500 for the Sensex in 2020 as it plans to focus on “quality and select attractively-valued turnaround candidates among consumer and consumer proxies.”
In a similar context, ICICI Securities expects “small-/micro-caps to outperform mid-caps as the former asset classes have much higher margin of safety in terms of the risk-spread over large-caps.”
“Widening of risk-spreads is a result of significant underperformance of small- and micro-caps to large-caps since the peak of January 2018. Risk spreads for micro-caps over large-caps in particular have risen considerably and become very attractive,” it had said in an earlier note.
Incidentally, the four-year period between 2014 and 2017 saw the broader indices performing better than the benchmark Sensex in each of the years.
