Could 2021 be the year of midcaps?

New Delhi, Jan 12 (IANS) Midcap stocks outperformed large cap stocks in 12 out of last 20 years, including in 2020.

A comparison of the large caps meaning Nifty 50 and midcaps meaning Nifty 100 Midcap Index shows that in the year 2020, midcaps outperformed large caps by 7 per cent. While large caps gave a return of 15 per cent, midcaps gave a return of 22 per cent, according to Harshad Patwardhan, CIO (equities), Edelweiss Asset Management Limited.

Patwardhan said mid and small caps could outperform large caps as growth is likely to be broad based on the way up.

Economic activity has bottomed out and recovery has surprised positively with the government actively encouraging revival with unrelenting focus. In addition, benign monetary conditions are likely to continue, he said.

Patwardhan said historical experience suggests good odds of outperformance.

After big mid/small cap underperformance over 2018 and 2019, is a good chance of a reversal already underway? Patwardhan said over an ideal investment horizon of 3-5 years, odds are very attractive. Front ending of returns is on the way up for midcaps, he said.

That FPIs don’t invest in midcaps is a myth, he said, as the shareholding of FPIs in the NSE 100 Midcap index is 16.4 per cent.

Patwardhan said over long periods of time, midcaps have outperformed large caps. Over a 10 and 15-year holding period, midcaps have posted better returns than large caps.

There are high odds of midcaps outperforming over 3-5 years investment horizon.

On a 3-year daily rolling return basis, 65 per cent of times midcap index has outperformed the large cap index. On a 5-year daily rolling return basis, 77 per cent of times midcap index has outperformed the large cap index.

Historically, the NSE Midcap100 Index has delivered positive returns in 14/20 years, with a CAGR of 16.5 per cent, Patwardhan said.

Patwardhan said the risks to this premise could be subsequent infection waves derailing economic recovery, global risk off events, global central banks reversing benign monetary policy due to inflation, and the Indian government going back on key reforms.

“The mid/small cap segment is likely to be more volatile and corrections are part of the game,” Patwardhan said.

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