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Your Money: Tread with caution in the mid-cap/small-cap space

Economic activity has continued to improve in June and July (the unlocking began in the first week of June 2021).

By Sorbh Gupta

The broader market continues its outperformance. The S&P BSE Midcap Index appreciated by 2.54% and the S&P BSE Smallcap Index rose by 6.30%.With this month’s performance, the midcap and the smallcap index have given the return of 29.4% and 48.6%, respectively on a YTD basis.

Economic activity has continued to improve in June and July (the unlocking began in the first week of June 2021). However, most indicators are soft as compared to March 2021 (before the second wave lockdown). In the near-term, recovery should continue as companies rebuild channel inventories for the festive season. However, while the macroeconomic indicators are improving, credit demand in the economy, especially for a business loan, is still lacklustre. Business loans have grown at anaemic levels of 1% y-o-y in July.

FPIs have been sellers
FPIs have turned sellers of Indian equities in July. They have sold $1.5bn worth of Indian equities this month. On a YTD basis, FPI inflows stand at $6.54 bn. Domestic institutional investors have been buyers in the month of July to the tune of $2.08 bn. With nominal GDP growth improving and much of the developed world still grappling with near-zero interest rates, India will attract its fair share of foreign flows.

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Macro-economic shocks over the last few years like demonetisation, hastily implemented GST, IL&FS crisis & Covid-19 induced lockdowns have helped the large companies become larger and stronger, helped by scale and balance sheet strength. The smaller companies however, have weakened and lost market share.

Mid-cap valuations are high
In this backdrop, as Covid-19 related uncertainty still lingers on, the midcap valuations are at close to all-time highs. Markets are choosing to ignore the risks associated with investing in smaller companies, but this could reverse quickly if global liquidity dries up or we face a Covid-19 third wave. We would like to reiterate our stance to tread with caution in the midcap and small-cap space.

Retail investors should stagger their investments and diversify their equity allocation among different styles and caps for optimum results from their long-term equity allocation.

The writer is fund manager, Equity, Quantum Mutual Fund


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