Indian midcap, smallcap stock rally in 2024 is the best in the world

The rally in Indian mid-and smallcap indices thus far in calendar year 2024 (CY24) has been the best in class across the world, eclipsing the global FTSE benchmarks, and also out running peers from other leading world stock markets.

This is despite the correction in the mid-and smallcap segments back home seen in the last few days, triggered by valuation concerns, geopolitical developments amid nervousness ahead of the July – September 2024 (Q2-FY25) corporate results season.

While the FTSE Global Mid Cap index and FTSE Global Small Cap indices have moved up 12 per cent and 9.3 per cent during this period, Bloomberg data shows, the FTSE Global India Small Cap index has outperformed these global benchmarks with a 25.2 per cent surge in CY24.

The mid- and small-cap indices on the NSE back home have gained 25.7 per cent and 26.7 per cent, respectively in CY24.

The FTSE Global Mid/Small Cap Index is part of a range of indexes designed to help investors benchmark their international investments.

The index comprises mid and small cap stocks from around the world.

The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 99 per cent of the world's investable market capitalisation.

Among the frontline global mid-and small-cap indexes, FTSE Germany Mid Cap Index gained the most with an up move of up 20 per cent.

FTSE South Africa Mid Cap Index (up 14.6 per cent) and FTSE Japan Mid Cap Index (10.7 per cent), FTSE Global South Africa Smallcap (20.2 per cent), FTSE Global Taiwan Small Cap Index (12.1 per cent) and FTSE Greater China Small Cap Index (6.5 per cent) were among the other key gainers.

"The ongoing trend of large-caps outperforming mid-and small-caps in India is likely to sustain, going forward. Investors need not rush to buy the beaten down stocks from the mid-and small-cap baskets as there is more pain left in these segments, especially where valuations continue to remain very high.

"That said, there can be individual cases of sharp rebounds," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Meanwhile, analysts had been cautioning against the liquidity-driven sharp run up in the midcap and smallcap stocks in India amid expectations of tepid earnings growth in the quarters ahead.

The disconnect between earnings growth and stock prices, analysts at Bernstein had cautioned in April 2024, was even more visible in the small-and mid-cap (SMID) universe.

"Sectors with decent earnings upgrades show a disproportionately high movement in their stock prices - suggesting an optimistic overpricing.

"This disconnect is easily above 30 per cent for most sectors.

"With no FY25 earnings upgrades in the last three months, even IT has seen 50 per cent of stocks showing a positive return," wrote Venugopal Garre, managing director at Bernstein in a coauthored note with Nikhil Arela in April 2024.

The midcap space, in particular, cautions Sameet Chavan, head of research for technical and derivative at Angel One, saw a sharp decline in the last few days, breaking below key support levels and signaling more pain ahead.

“Bottom-fishing in this segment should be avoided for now," Chavan said.