Mid and smallcap indices hit new 52-week high. What should investors do?

“Mid and small-cap stocks have seen a sharp rally in the past two months and the mid and smallcap indices have outperformed the largecaps. We attribute the broad market rally to better domestic macroeconomic outlook (lower inflation and CAD) and improving profitability, led by lower raw material prices,” Kotak Equities said.

However, the sharp rally in mid and small-caps seems to be bordering on euphoria as consumption demand is still sluggish and valuations have gone to unrealistic levels in most cases, it added.

From Midcap100 pack, Jindal Steel, Dr Lal Path Labs, and Shriram Finance surged over 5%. Delhivery, Ashok Leyland, and Max Healthcare Institute rose over 3%, whereas, from Smallcap100, shares of MRPL and CreditAccess Grameen surged over 6%. JB Chemicals & Pharmaceuticals, Borosil

Renewables, Cochin Shipyard, Central Bank, and Metropolis Healthcare rose over 3% in today’s trade.

The multiples of the midcap and smallcap indices have rerated sharply since mid-March as a result of the recent rally, after the derating seen over 2021-22 during the Covid-19 pandemic.

More importantly, most midcaps are trading well above their pre-Covid multiples, which reflects the markets’ high expectations from the mid-cap companies and low concerns about possible disruption to business models, Kotak said.The brokerage firm further stated that “Our analysis of the top-performing midcaps and smallcaps shows strong performance across sectors in the past three months. Rate sensitives such as financials and real estate feature among the top performers understandably, given the positive change in market expectations on interest rates.”

“Others have rallied on strong 4QFY23 earnings on improved profitability (automobile components); some of the profitability gains will likely fade over time, strong outlook (capital goods, defence, industrials) and sector-and company-specific narratives,” it added.

Only BFSI stocks in general now offer a decent reward-risk balance on the CMP-FV equation, Kotak Institutional Equities said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)