Are the battered midand small-cap shares a steal? Thats what some fund managers feel after the sharp dip in these shares in the last few months. They are recommending investors to spread across the purchases of these shares over the next year or so or start a Systematic Investment Plan (SIP) in a small and mid-cap equity scheme.
The relatively bullish outlook for these smaller shares are a contrast to what investors thought about them earlier this year. Then, the market was unanimous that share valuations were steep and a sell-off was in the offing.
So far in 2018, the NSE Midcap 100 has lost 19 per cent, while the NSE Small cap 100 Index is down 33 per cent. Many shares have tumbled 50-70 per cent this year so far. Fund managers said the slump has eased concerns over rich valuations.
“The froth in mid and small cap stocks is over,” said Akash Singhania, Fund Manager, Motilal Oswal Mutual Fund. “Earnings for the Nifty Midcap 100 will grow by 20 per cent this year, while the PE (price to earnings ratio) has fallen from 50 in January to 30 now.”
Investors could accumulate midcap stocks over the next three months, he said.
Over the last three years the Nifty Smallcap index has returned an annualised 5 per cent as compared to the Nifty 50 return of 12.73 per cent.
“This divergence shows there is opportunity in the small cap segment where valuations have started to look much more reasonable,” said Pankaj Tibrewal, Fund Manager, Kotak Mutual Fund.
In September, NSE small cap 100 corrected by almost 20 per cent and NSE Midcap 100 index has declined by 14 per cent. Tibrewal said after correction mid-cap and small-cap shares have underperformed the Nifty 50 by the largest margin, historically, making valuations reasonable. He too recommends a staggered approach to investing in mid and small cap funds.
Historically, mid- and small-cap shares have seen similar sharp drops. This is giving fund managers the confidence that these shares could rebound once the dust settles.
In 2006, the BSE Small Cap Index corrected by more than 40 per cent in 5-6 weeks on valuation concerns and margin selling. However small cap index recovered back to the 2006 highs in 6-8 months.
In 2007, the small cap index soared 135 per cent in 10 months from a low of 6000 in March 2007.
However, they witnessed a sharper fall in 2008 and 2009 amid the global financial crisis. After the rebound in mid-2009, the small cap index rose 290 per cent from the lows in just 18-20 months.
In 2011, small caps corrected around by 50 per cent in 12-14 months and the pain continued till 2013. However, post August 2013, small cap indices gained 100 per cent in less than a year.
“It would be prudent for investors to allocate 20 per cent of their corpus to midcap and smallcap funds as valuations in that space have become reasonable,” says Mahesh Patil, CIO of Aditya Birla SL Mutual Fund.