Mid Cap Rally in Indian Stock Market May Take a Breather Soon

Last year we faced a pandemic that was very difficult to comprehend not just for individuals, but also for the overall economy.

Now, even if the second wave of a pandemic is still on the rise, the S&P BSE Midcap Index has outperformed the benchmark S&P BSE Sensex Index in the last five months since the end of 2019.

If we compare the performance of mid-cap stocks to last year, we will get to know that these companies had suffered a lot in 2019 but today, we don't see a major change in these stock’s prices.

In fact, the outperformance of India’s mid-cap stocks over their larger peers may take a deep breather, as per the new investors. In the fiscal year 2021, the BSE midcap index rose 91% as India’s market capitalisation rose up to Rs91 trillion in a year and hence we can predict that the BSE Sensex Index has outperformed the Sensex post end of the pandemic; according to Bloomberg data.

Even the smaller stock of mid-cap companies has gained approximately 33% in a short period, which is more than double according to the set benchmark.

Mid Cap Stocks May Stop Growing Upwards: Rising Cases

As the mid-cap stocks outperformed the large-cap stocks in 2020, this year the experts predict that these stocks may hit a pause because of the second surge of COVID 19 infections across the country.

Due to the sudden pandemic, many investors are seeking large-cap stocks, especially in Bank stocks. In the current situation, everyone wants to play safe and therefore, investors find large-cap stocks (primarily bank stocks) are the safest options to invest in.

Mid-cap stocks may take a pause for some time but the performance depends a lot on the pace of vaccination. Last week, the Indian government announced that the vaccines will be available for everyone ranging over the age of 18, applicable from May 1.

As of now, India has vaccinated over 13 crore vaccinated doses and by doing this, the country becomes one of the fastest nations to vaccinate many people within a short span of time.

Earlier, investors used to be attracted towards mid-cap stocks as these stocks were relatively cheaper than other stocks, but that’s not the condition anymore. Nowadays, large companies are better equipped to handle crises and therefore these stocks are becoming the top priority of investors.

How Midcaps Fared Thus Far (Change)

Mid-cap companies in India are those who have a market capitalisation of Rs 5k Crore and less than Rs 20k Crore. These companies come under the top 100 companies that are listed on the stock exchanges (BSE and NSE). If we compare mid-cap stocks with the small caps, you will find out that the mid-cap stocks come with a moderate risk as compared to small-cap stocks. The risks of these stocks are comparatively higher than large-cap stocks.

Another advantage of applying for mid-cap stocks is that these stocks offer an opportunity for growth and in future, these stocks perform well with outstanding returns than large-cap stocks.

Mid-cap stocks are mainly responsible for boosting up the market share and profitability.

According to the present situation, the markets are in rallied mode, and when such things happen, investors are generally inclined towards large-caps, however, after the crash of 2020, investors have started to channelize their portfolio into mid-cap and small-cap stocks.

The primary factor that worked in the favour of mid-cap stocks is its low-interest regime that has been controlled by the Reserve Bank of India. Because of the low-interest rates, the capacity of taking risk appetite increases, which makes investors invest more in mid-cap stocks than other stocks.

Experts see a strong connection between the midcap index and repo rates. High liquidity and moderate risks are the major factors that contribute to the mid-cap rally.

A brokerage house says, whenever there is a disturbance, it has been followed by outperformance in mid-cap and small-cap indices. The same trend has been noticed in 2009, 2016, and 2017. This year: in March 2021, the Midcap Index outperformed both the Nifty Small-Cap and Nifty 50 indices.

If we see the performance of the Nifty Midcap index over the others, then last year, the Nifty mid-cap index bounced back by over 70 percent post-pandemic. However, Smallcap indices gained 19% in 2020.

Correction Phase

As the second wave of infections is still on the rise, the major indices of India Sensex and Nifty have seen some contraction this month. On April 20, Sensex fell 10 percent, after maintaining an all-time high of 52k levels in February. The Nifty has also gone down by 6% to 14,296 levels on April 20, after witnessing a peak of 15k levels.

Looking at the current scenario, investors are moving towards large-cap stocks considering it as the safest option to invest at this time.

However, the movement of investors toward large-cap stocks is temporary, they are doing this only because of market volatility. Once the market returns to its original pace, investors will prefer mid-cap stocks over long-term stocks.

Market Move in the Next Months

The ease of availability of vaccines, and economic recovery are some of the factors that may decide the market way; which way the stock market will move in the future.

According to the credit rating agency, Moody, the second wave will definitely hurt the economy which may affect the country’s future growth, however, the agency has also stated that the economy will grow in the double digits after a few months.

Conclusion

If the second wave curbs quickly and the economic resurgence gets started then mid-cap stocks will become the investor’s first choice over large-cap stocks. In 2020, when the stock market fell, the market saw a big bull which extended up to 2021.

Due to the unpredictability of the stock market, mid-cap stocks too had an unbeaten run. Although the mid-cap market sees a slower pace in the market, they will rise once the market regains and all things come at a normal pace.