All the constituents of mid- and small-cap indices though notwithstanding the accurate corrections indices are still trading above their long-term averages. Sources revealed that “Money managers see the valuation premium dissipating going ahead as the market faces uncertain times ahead because of rising global interest rate environment and macro concerns still weighing on the market”.
The trailing price-to-earnings ratio of all the constituents of the BSE MidCap index and the companies that are related to BSE Small Cap index are above their five-year average P/ E. These figures were brought over by Data compiled by ETIG Database. On this, the money managers were expecting a higher moderation in the P/ Es of small and mid-cap companies. The reason behind this being the market environment volatility depends upon local and global events.
Vinit Sambre, head of equities at DSP BlackRock Investment Managers even said that “The midcaps and small-caps were corrected recently with corporate governance issues and also low-quality companies which went up sharply in 2017. Companies with better business fundamentals corrected but not significantly”.
Regarding the midcaps and small caps correction part Sambre said that “The overall correction was not enough to bring down valuations below long-term averages but we expect the moderate correction in valuation going ahead,”
The BSE MidCap index fell 12.7 per cent from its high of 18,321.37 on January 9 while the BSE SmallCap index falls down 16 per cent from its record high of 20,183.45 on January 15 this year. In 2017, the BSE MidCap Index and the SmallCap index had surged 48.1 per cent and 59.6 per cent.
“I don’t see any reason for midcaps and smallcaps to go back into stronger position from here. The premium versus large-caps has shrunk and will shrink further,” said Ravi Muthukrishnan, head of institutional equity research at Elara Securities.
The rushing oil prices, trade wars, low rupee strength and political uncertainty on the domestic front have made the condition of the market even worse whereas the mid and small cap stocks have seen their first meaningful correction in a year and many of them remained expensive with no changes in them.
“Global interest rates rising may impact flows, and therefore the valuation premium will dissipate,” said Phani Sekhar, Fund Manager-PMS at Karvy Stock Broking.
Vinit Sambre, head of equities at DSP BlackRock Investment Manager said that only after 5-7 per cent further correction one can look at good quality midcaps. He further added that it would be more sensible to buy large-cap stocks in the upcoming term.