Midcaps run out of steam in October on profit booking

By Urvashi Valecha

Even though the markets have recovered from their March lows, midcap stocks seem to have lost steam. While the Sensex and Nifty have risen by 52.9% and 53.35% since March 23 till date, Nifty Midcap100 has outperformed the benchmarks with gains of 54.43%. However, the speed of the midcap rally seems to have slowed down in October and have underperformed the benchmarks in October.

Midcap stocks had rallied in September as Sebi came out with a circular mandating mutual funds to allocate 25% each to large, mid and small cap stocks in their multicap schemes to be true to label. In the hopes that fund houses would need to re-balance their portfolios, the mid and smallcaps rallied sharply in September.

But the category of stocks seems to have run out of steam in October. So far, the Nifty and Sensex have risen by 4.2% to 4.8% this month. What’s more is that the Nifty Midcap 100, which was consistently outperforming the benchmarks since March, has declined by 0.8%. From the period between March and September, Nifty Midcap100 was up by 54.52%, whereas the benchmark Nifty was up by 47.79%.

The Nifty Midcap 100 is trading at a slightly higher one year forward PE of 20.28 times whereas Nifty trades at a one year forward PE of 20.21 times. Both the indices are trading above their 10-year historical average of 15.6 times and 15.7 times.

Experts suggest that the midcap stocks could witness another rally once the valuations become more reasonable. Devarsh Vakil, deputy head — retail research, HDFC Securities, said, “’The underperformance is not concerning in any way, the midcap index is going through a period of consolidation. After March, many stocks more than doubled in value. Naturally, investors who would have invested in March or after that would want to take profits at the high levels. Also, once the earnings start coming in and valuations become more reasonable, stocks will witness another rally.”

Experts also say the Nifty Midcap100 index is witnessing profit-taking. Ambareesh Baliga, an independent market expert, said, “A lot of midcap stocks had become multibaggers in the last six months and their valuations have run up. So, we could be witnessing profit-taking in the midcap stocks. As long as investors and traders don’t lose capital in a significant way, the liquidity in the markets will not dry up. Thus, the outlook for midcap stocks still appears to be benign. However, investors should be cautious while investing fresh.”