BSE Midcap, Smallcap Stocks Surge: Gains, Reasons & Outlook

New Delhi, Jul 17 (PTI) Smaller stocks have emerged as markets' favourites so far this year, giving big returns to investors amid optimism over the country's macroeconomic fundamentals and surge in domestic liquidity.

Till July 16 this year, the BSE midcap gauge has jumped 10,984.72 points or 29.81 per cent, while the smallcap index has surged 11,628.13 points or 27.24 per cent.

In comparison, the BSE 30-share benchmark Sensex has rallied 8,476.29 points or 11.73 per cent so far this year.

"The primary reason for the outperformance of midcap and smallcap stocks is the surge in domestic liquidity. A substantial amount of domestic money is flowing into these segments through mutual funds, portfolio management services (PMS), and direct investments," said Sunil Nyati, Managing Director, Swastika Investmart Ltd.

We are currently in a structural bull market, where midcap and smallcap stocks tend to outperform, he noted.

"While largecap stocks have also performed well, they have lagged behind midcap and smallcap stocks due to selling by foreign institutional investors (FIIs)," Nyati added.

Stock markets are closed on Wednesday on account of Muharram.

Experts said equity markets are experiencing a prolonged bull run, and it is during this time that the midcap and smallcap segments tend to outshine their larger counterparts.

"We are currently in a global bull market led by the US, while our market is outperforming other emerging markets due to strong fundamentals and abundant domestic liquidity.

"Although there are valuation concerns, particularly in the midcap and smallcap segments, the large-cap space still has room for further upside. Furthermore, foreign institutional investors have now shifted to a buying mood after aggressively selling in the first half of 2024," Nyati said.

The BSE midcap gauge hit its all-time high of 48,175.21 on July 16 this year, while the smallcap index reached its lifetime peak of 54,617.75 on July 8.

The BSE benchmark hit its record high of 80,898.3 on July 16.

"The outperformance of midcap and smallcap indices compared to the Sensex this year can be attributed to sector-specific strengths in technology, healthcare, and consumer goods, coupled with their lower valuations and higher growth potential in a booming economy," said Arvinder Singh Nanda, Senior Vice President, Master Capital Services Ltd.

The midcap index tracks companies with a market value that is on average one-fifth of blue-chips, while smallcap firms are almost a tenth of that universe.

"There is some froth in the midcap and smallcap space, and the risk of a correction exists. However, timing this correction is challenging amid the current flood of liquidity. While there is no immediate trigger for a correction, any policy changes or earnings disappointments could potentially serve as catalysts," Nyati said.

The market is likely to continue its rally provided there are no negative surprises from the upcoming Budget, he noted.

"Clear signs of impending rate cuts in the US could lead to aggressive FII inflows into emerging markets like India, further boosting our market," Nyati added.

According to analysts, smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms.

Experts said active participation from domestic investors has played a big role in pushing the broader market counters.

According to Nanda, the future trajectory of midcap and smallcap indices depends on several factors, including economic conditions, corporate earnings performance, investor sentiment, and global market dynamics.

"While the current rally suggests strong momentum driven by sectoral strengths and investor optimism, corrections can occur due to profit-taking, changes in market sentiment, or external shocks," Nanda added.