Will midcap rally see a breather soon?

It’s been a full circle for the markets, from the crash of March 2020 owing to Covid-19 fears and the subsequent rally. On the midcap front, in the fiscal year 2021, the BSE Midcap Index rose 91 per cent, as India’s market capitalisation grew Rs 91 trillion in the year, to touch Rs 204 trillion. The BSE Midcap Index has outperformed the Sensex for a major part of 2020, barring five months, according to Bloomberg data.

Midcap rally may hit a pause: rising cases

However, now, analysts expect that midcap stocks may hit a pause over the second surge of Covid-19 infections across several states. Many states have imposed curbs and weekend lockdowns in order to contain the surging cases. Midcap stocks may take a breather over the coming weeks but a lot also depends on the pace of vaccinations. India has now announced that vaccines will be made available for everyone over the age of 18, come May 1. The country has already vaccinated over 13 crore vaccine doses, becoming the fastest nation to vaccinate such a chunk of the population.

How midcaps fared thus far

Midcap firms in the Indian system mean those that have a market cap of Rs 5,000 crore and less than Rs 20,000 crore. These companies make up the top 100 to 300 companies that are listed. When compared to small caps, midcap stocks are those with moderate risk but when stacked up against large-cap stocks the latter is more stable. Midcaps offer an opportunity for growth as there is space to boost market share and profitability; midcaps tend to rally when the stock markets are on a bull run. When the markets get into a rally mode, investments typically flow into large caps but following the crash of 2020 and the spectacular rally ever since investor wealth has also been channelised into midcaps and small caps.

The factor that worked in favour of midcap stocks was a low-interest rate regime that has been sustained by the Reserve Bank of India. When interest rates are low, the capacity or appetite for risk increases, thereby drawing more investors to midcap stocks. Experts note the strong link between the Midcap Index to Nifty50 ratio and repo rates. High liquidity through a major part of 2020 also contributed to the midcap rally.

According to brokerage house Jeffries, typically, whenever there has been a spell of disruption, it has been followed by outperformance in the midcap and small-cap indices. This trend has been noted in 2009, 2016 and 2017. Even in 2020 and this year, both the indices have beaten the Nifty50; a March 2021 Jefferies report says that the Nifty Midcap Index has outpaced both Nifty50 and the Nifty Smallcap indices in the past decade. Accordingly, the Nifty Midcap Index bounced back by over 70 per cent since June 1, 2020. The BSE Midcap and Smallcap indices gained 19 and 30 per cent respectively in 2020 and 83 per cent and 100 per cent, respectively ever since the low of March 23.

Correction phase

With the second wave of infections, the Sensex has been seeing some corrections over the past few weeks. The Sensex fell 10 per cent on April 20 after witnessing an all-time peak of 52k plus levels in February. The Nifty has also shed six per cent to 14,296.40 levels on April 20, following the peak of 15k levels. Investors may look at large-caps as an option at a time when the markets are witnessing volatility. Mid and small caps are likely to take a breather over the immediate short term.

The pace of vaccinations and economic recovery may decide which way the markets go in the near future. Although credit rating agency Moody’s said the second wave presents a risk to the country’s growth forecast, it noted that the economy will still grow in double digits this year. Moody’s has estimated that the economy will grow 12 per cent in 2021 and for FY 2021-22, it revised the growth estimate for India to 13.7 per cent in February.

Conclusion

If the second wave of infections is curbed and economic revival is along expected lines, the markets will sustain their bull run. Midcaps will continue to see investor interest over the mid to long term, although they may seem like a less stable option at a time when the markets are experiencing a correction. In 2020, after the stock market fall of March, the markets saw a long bull run, which extended into 2021 as well, with the Sensex scaling all-time peaks of 52k levels. Owing to this upbeat sentiment in the markets, midcap stocks too had an unbeaten run. It is likely that midcaps will see a slower pace for the immediate future but that may change once markets regain and beat earlier peaks following the vaccination drive.