Mid cap stocks will remain under pressure for few more months, say experts

• Investors have turned cautious at this stage due to uncertainty around the US recession.
• This had led them to choose large caps as ‘best among equals’ over midcaps.
• Another reason for the recent fall in mid caps could be that their valuations have been going so a higher level of correction was expected anyway, say experts.

Stocks markets are seeing a huge selloff across sectors and domains. But a general trend has been that the fall in midcap stocks is steeper than it is in the large cap stocks.

Due to the uncertainty around a possible recession in the US and its effect on Indian stocks, investors in general have turned cautious. At this stage, they have chosen large caps as ‘best among equals’ over midcaps.

Another reason could be that midcaps valuations have been going up and what’s visible in the market now is possibly a fair value, say experts. Mid caps also tend to move sharply due to lower stock volumes.

“They had really gone up too much at one stage compared to the large cap, so a higher level of correction was expected anyway. Inherently mid cap and small caps will be more volatile compared to large caps in a few months because they are riskier, less liquid and therefore move on smaller volumes,” G Pradeepkumar, CEO of Union Asset Management Company told Business Insider.

The sentiment selloff could bottom out
The extensive FII outflow to the tune of ₹2.07 lakh crore that we have seen in the last six months too had no effect on midcap valuations, as per experts. According to Vikaas M Sachdeva, CEO of Emkay Investment Managers, what is happening now is normal market condition-driven selloff.

“FIIs in any case are not present in most midcaps, they are present only in the larger mid caps. Domestic mutual funds are there but because the flow is strong in SIPs so there is no selling pressure here. If it is sentiment driven then there is no structural issue as such and it will bottom out soon,” Vikaas M Sachdeva, CEO of Emkay Investment Managers, told Business Insider.

The earnings upcycle
After a possible bottoming out of sentiment, the next phase of valuations will depend on earnings - as investors will turn into a wait and watch mode.

“Interest rates and ensuing discussion around it has already started getting factored in stock prices. Now the market is looking at the next set of results, which even if they are decent and not spectacular, it's fine as there are a lot of concerns around inflation that would affect the profitability of certain companies. My sense is you could probably see a bottoming out happening and results might be decent and it will not be as bad as expected,” added Sachdeva.

The MF downturn angle
However, more allocations into the midcaps by mutual funds might however remain tepid. Midcap and smallcap funds outperform in an up-cycle while underperform in a down-cycle, says a report by ICICI Securities.

“While it is difficult to predict till how long the current market cycle would continue, it is prudent to adopt a cautious approach while making a fresh allocation in midcap/smallcap funds. In the current uncertain and extremely volatile environment, it is important to follow discipline of not getting carried away by the market fall,” says the report.

Unlike in the case of large caps, fewer people and funds alike are interested in buying the dip. While mutual funds themselves face no fund crunch, a lot of back and forth could happen in small and midcap stocks – which means there would be more volatility even after sentiment dies down and earnings don’t necessarily disappoint.

“Redemptions at the mutual fund level are not happening. Some of the less liquid mid caps and small caps are being affected more but better quality mid caps are less effective but then they are expensive. Hence we can definitely expect volatility in mid cap and small in near term,” added Pradeepkumar.


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