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Mid-, smallcaps outperform in first half of 2021

By Deepak Korgaonkar and Nikita Vashisht
July 08, 2021 13:47 IST
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The outperformance in H1-CY21 comes on the back of improved earnings and strong inflows from the FPIs in Indian equities.


Illustration: Dominic Xavier/

Mid- and small-cap indices have outperformed the frontline benchmarks – the S&P BSE Sensex (up around 10 per cent) and the Nifty50 (13 per cent) – in the first half of calendar year 2021 (H1-CY21) by rallying 26 per cent and 39 per cent, respectively.

The trend, analysts believe, is likely to continue in H2-CY21 as well.


The outperformance in H1-CY21 comes on the back of improved earnings and strong inflows from the foreign portfolio investors (FPIs) in Indian equities.

However, good monsoon so far, gradual opening up of the economy and the pick-up in the pace of vaccination provides support to the market.

Another key mover of these two segments over the past few months have been retail investors, who according to analysts, have flocked to these two market segments after tasting success with their investments in 2020.

"Retail investors were attracted by throwaway prices of stocks (seen during the March 2020 crash), rise in risk-appetite given lack of substantial change in personal income, fall in cost of leverage and, rise in free time due to a nationwide lockdown," reasons Vinod Nair, head of research at Geojit Financial Services.

While their participation, he says, will benefit the Indian equity markets in the short to medium-term, as accommodative fiscal and monetary policies are expected to continue amid lingering pandemic concerns, the sustenance of their trading activity will depend on their ability to maintain profits and trends in global markets.

In H1-CY20, the Smallcap and Midcap index had declined 9.6 per cent and 12.8 per cent, respectively.

However, in H2CY20, the picture was completely different as these indices rallied 46 per cent and 37 per cent, respectively and more than made up for the losses in the first half of the calendar year.

Nair of Geojit attributes this rally in the broader market to a progressive global market supported by easy money policy which boosted the value of equity assets and pushed the economy.

"Some sectors gained from the pandemic either due to high demand in products and services based on technology, pharma and consumption or rise in prices due to shortage of supply," he says.

Among sectors, the metal index recorded robust performance with S&P BSE Metal and Nifty Metal indexes gaining 63 per cent in H1CY21.

Nifty PSU Bank index surged 47 per cent on hopes of divestment surrounding state-owned banks and asset quality improvement.

Power, infrastructure, information technology (IT) and capital goods indexes, too, fared better as compared to benchmark indices.

Pharmaceuticals, telecom, private banks and fast moving consumer goods (FMCG) companies, however, were the laggards in H1CY21.

"Going ahead, we expect markets to consolidate in a range and see Nifty in the range of 16,500-17,000 by the end of 2021.

"However, we expect better performance from banks, auto, consumer discretionary and PSU stocks," says Gaurav Dua, head of capital market strategy at Sharekhan.

Total 80 stocks from the S&P BSE Allcap index have seen their market values appreciate over 100 per cent in the past six months.

The index, which accounts for 96 per cent market capitalisation of BSE listed companies, including Sensex, midcap and smallcap companies.

Other 185 stocks, of total 867 stocks from the index, have rallied between 50 percent and 99 percent, and 87 gained in the range of 40 per cent to 49 per cent during this period.

Going into H2-CY21, most analysts feel that the market are likely to remain choppu and will take cues from both global and domestic factors.

While growth in corporate earnings, pace of vaccination against Covid, a possible third wave of the pandemic and policies of the central government and regulators will take centre-stage, at the global level the policies of major central banks, oil prices, bond yields, prices of key commodities and other geopolitical issues are likely to guide markets.

“As economic recovery gains traction over the next couple of years, broader market earnings growth over the latter part of FY21-23 will be robust and is expected to be higher than NIFTY50’s growth.

"Improving growth can support valuations in the broader market thereby, providing moderate returns (10-15 per cent), given the reduced valuation gap with large caps.

"On the flip side, expectations of a sharp outperformance from mid and small caps going ahead will be belied,” wrote Vinod Karki and Siddharth Gupta of ICICI Securities in a recent note.

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Deepak Korgaonkar and Nikita Vashisht in Mumbai/New Delhi
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