After a strong rally in midcap and smallcap stocks in the last one year, one might on the face of it, tend to believe that switching to largecaps is ideal. But, from a valuation standpoint, the midcap and smallcap indices are still trading well below their historical averages, says Pawan Bharadia, managing director, Equitree Capital Advisors.
While there is exuberance in some pockets of mid and smallcaps, there are enough and more opportunities within the smallcap space where valuations are reasonable and may continue to generate alpha returns even from hereon, Bharadia said. Edited excerpts from an interview with ETMarkets:
Is it time to switch to largecaps, or is there more steam left in the midcap and smallcap space?
Midcaps and smallcaps indices have had a good run over the last year, delivering 40-44% returns, whereas the Nifty has given a somber 9% return only over the same period.
So, on the face of it, one may tend to believe that it’s time to switch to large caps hoping for the underperformance to catch up.
However, if one looks at the valuations, Nifty is trading at 21x P/E which is closer to its long term averages whereas midcap and smallcap indices are trading at 22.4x and 26.24x, respectively, which is well below their historical averages.
There is indeed exuberance in some pockets of mid and smallcaps, and one needs to be wary of such extreme valuations in light of expected growth.
Overall, there still continues to be enough and more opportunities