Could Midcaps See a Correction?

Fri, 15 Jan Pre-Open

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Stability in the global economy is hard to find. The economic slowdown in various markets is doing the rounds. And stock markets are influenced in an instant with notice of these tumults. Indian stock markets are no different. They have been witnessing major volatility. A recent example can be the Chinese slowdown that took Indian Indices deep into the red. A spate of corrections began doing the rounds. Alas, investors seeking quick profits gravitated towards midcap and small cap stocks. However, will their appetite for these stocks continue? Let's note some facts to answer that.

As an article in Business Standard points out, small-cap and mid-cap shares can potentially see a serious fall if the downtrend continues. The reason for this stems from valuations. The PE multiple of the NSE Midcap 100 index is currently 23% more than the Nifty. The Nifty currently trades at a trailing 12 month PE of 20. The Midcap 100 index, on the other hand, trades at a PE of 27. This shows a shift in the paradigm since the market rally in 2014, when the Nifty traded at a 25% premium to the midcap index.

Under normal circumstances, midcaps trade at a discount to large caps in majority of the times.

However, while there could be a correction in prices, one predict this course. Things can turn out the other way around. Nevertheless, over exposure to midcap stocks at higher valuations is always a dangerous game to play.

One could play it safe by investing and focusing only on larger companies. But one cannot expect exciting returns from this segment. For that extra boost to a portfolio, we believe a certain amount of exposure to mid and smallcaps is essential. But it may be noted that this would be subjective to one's risk profile. At the end of the day, midcaps and smallcaps are higher growth but also higher risk companies. Due to the same, too much exposure to such stocks is not ideally desired as well. To help investors with such allocation decisions, we have created an asset allocation guide. This is an effort to highlight the various factors influencing asset allocation in equities and also guide investors on how to allocate funds within the equity investments space so as to achieve optimum returns from them.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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