Small, midcap rally may lose steam

After a strong run in the midcap and smallcap indices, which surged 46 per cent and 43 per cent, respectively, on the National Stock Exchange (NSE) during Samvat 2080, analysts suggest that the rally in these segments may pause to catch its breath in Samvat 2081.

The S&P BSE Sensex and the NSE Nifty gained 26 per cent and 29 per cent, respectively, during the same period, according to data.

Analysts believe the overall market mood will stay positive in Samvat 2081 as long as the geopolitical situation, especially in West Asia, and crude oil prices remain stable.

The policies of global central banks, the outcome of the US presidential election, and corporate earnings growth in India will be on the market’s radar.

Analysts recommend that investors allocate most of their investable surplus to the relative safety of largecap stocks while being selective within the midcap and smallcap segments. They see a more favourable risk/reward ratio in largecaps.

“The main driver of the bull run in Indian equities has been sustained domestic flows, which have absorbed the selling by foreign institutional investors.

"Domestic flows will continue to support the market, but elevated valuations may cap the upside.

"The Nifty is likely to consolidate around the 25,000 level,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Despite the recent correction, the BSE SmallCap, according to Gaurav Dua, senior vice-president and head of capital markets strategy at Sharekhan by BNP Paribas, still trades at a 40-45 per cent premium to the Nifty based on trailing 12-month earnings.

"Experience shows that smallcap and microcap stocks tend to slip into a deeper correction after 17-18 months of a one-way rally.

"Historically, the smallcap index has corrected by 15-25 per cent, with individual stocks seeing much deeper corrections,” Dua said.

Worrying signals

Another concern for the markets, analysts observed, is sticky inflation and the central bank’s decision to keep rates steady, at least for now. Demand conditions, they believe, remain uncertain, and prolonged rains and floods have impacted growth in the July-September quarter of 2024-25 (FY25).

Rural demand is slowly recovering, according to Amnish Aggarwal, head of research at Prabhudas Lilladher.

Recent government initiatives to improve rural incomes, including raising the MSP, increasing import duties on edible oils, allowing onion exports, and removing price caps on rice exports, are expected to boost farm incomes.

However, Aggarwal cautioned that these measures could lead to a rise in food inflation in the coming months.

That said, capital goods, infrastructure, ports, hospitals, tourism, new energy, e-commerce, and telecommunications are some of the emerging sectors to consider for investment at the right valuations, he added.

Aggarwal's bull-case target for the Nifty is 29,260, while the bear-case target stands at 25,080.