Anand Rathi lists 4 reasons why small, midcap stocks will outperform in next 12 months

smallcap stocks may have yielded weak returns for investors in the last few months, but if one still looks at the one-year return, then the minions remain an outperformer to the largecaps.

In the past 12 months, small and midcap stocks have given returns exceeding 50% compared to largecaps.

The near-term correction notwithstanding, Anand Rathi Shares & Stocks shares four reasons why it sees small and midcap stocks outperforming largecaps over the next 12 months.

Historical precedence: The exceptional performance of mid and smallcaps over largecaps has historical precedence, particularly evident from 2014 to 2017.

Rebounding from lows: The remarkable gains in the past 12 months can be attributed to a rebound from the significant underperformance experienced in 2018-19, and once more in 2022, marking the recent surge as a catch-up rather than an anomaly.

Fundamental strength: The upswing in mid and smallcaps is grounded in substantial earnings growth, with a CAGR of 30% and 37%, respectively since 2018 versus 16% for largecaps.

Valuation justification: Despite a noticeable decrease in risk-free interest rates, which typically warrant higher equity multiples, we do not find froth in valuations.
In light of these factors, we advocate a favorable stance towards mid and smallcaps for an investment horizon extending 12 months.

At a time when the universe is talking about the formation of froth in the Indian equity market, Anand Rathi holds a contrarian view. It believes that Nifty 50 and Nifty Largecap 100 are