Mid-Small Cap outperformance to continue amid strong inflow: Jefferies

Jefferies India in its recent report said that the ongoing trend of mid-cap and small-cap stocks outperforming large-cap and multicap stocks is expected to continue, thanks to strong inflows into this segment.

According to data from AMFI, small-cap and mid-cap focused mutual funds have witnessed net inflows of Rs 209 billion year-to-date (CYTD), which is 1.7 times higher than the inflows into large and multicap equity funds. Specifically, inflows into small-cap funds have increased by 53% compared to the same period last year, while mid-cap funds have experienced a decrease of 8%. On the other hand, inflows into large-cap funds have significantly declined by 95% during the same period.

Jefferies India holds an optimistic outlook for the small- and mid-cap space, primarily due to its greater representation of domestic economy stocks and a substantial increase in their preferred property/industrial stocks. Given the limited investment cycle opportunities for large-cap stocks, the increased demand for small- and mid-caps has the potential to drive significant outperformance.

Preferred picks

Jefferies maintains an overweight stance on the industrial and property sectors within its model portfolio, with a combined overweight of 7 percentage points (ppt). In the industrial sector, its preferred picks include L&T, Siemens, ABB, Thermax, Blue Star, Bharat Electronics, TCI Express, KEI, Polycab, Supreme Industries, Kajaria Ceramics, and Dalmia Cement in the cement industry. Among property stocks, its preferred choices are Lodha, Godrej Properties, DLF, and Prestige.

Both mid-cap and small-cap indices have jumped over 20 percent each while benchmark Sensex and Nifty risen nearly 10 percent since March 28, 2023. This can be attributed to various factors such as positive macroeconomic indicators including the Reserve Bank of India’s decision to pause, inflation falling below 5%, and better-than-expected GDP performance. These factors, along with a broader cyclical recovery, have played a role in driving gains for companies with a more domestic-focused approach.

Recovery in the domestic capital expenditure (capex) cycle is also key drivers to the outperformance of the midcap and smallcaps. Sectors such as Financial, Industrials, and Property have contributed 51% to the gains of the mid-cap index year-to-date (YTD). Notably, among the 96 industrials and realty stocks in the NSE500 index, approximately 70% have delivered higher gains than the median gain of 6%, Jefferies report said.

Retail Participation

Meanwhile, Jefferies expects the retail participation has yet to rise substantially in this current rally of mid and smallcap.

According to Jefferies, based on historical data, there is a close correlation between the price performance of mid-cap stocks and their trading volumes. Currently, the volume share of mid-cap stocks is in line with its 10-year average of 30%. Although the mid-cap index has reached new highs, the volume share is below the peak observed in late 2021.

Furthermore, when analysing the overall market volatility, our analysis indicates that the share of non-institutional volumes stands at 77%, which is also in line with the historical average.