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Will small and midcaps be wealth creators of 2020?

Every fund manager we meet advises us that the theme for 2020 seems to be about shifting the portfolio, slowly and steadily, towards Mid & Small-cap funds. Many brokers are also saying the same.

Everyone who has invested in mid or small-cap funds have fresh memories of the carnage that the funds witnessed in 2018 and sadly, 2019 has not been that different either.

So why is this being suggested now by the experts?

Over the last 1 year, PE for Nifty has increased from 26x to 29x. However, the PE for midcaps has fallen from 42x to 25x and for Smallcaps from 56x to 23 times. Clearly, large-cap has become expensive and Mid and Small caps are getting relatively cheaper!

A combination of IL&FS scam that led to a massive sell-off in NBFC stocks, to SEBIs reclassification of funds, a slowing economy, high-interest rate despite RBI rate cuts, a string of corporate bond defaults all have led to the current situation, where Large Caps are much more expensive.

Over the last one, two and three months, the BSE Smallcap index has been consistently outperforming the BSE Sensex. The BSE Midcap index has performed in line with the Sensex during this period, but this is in stark contrast to the trend for much for the last two years when midcap stocks were getting pummeled.

The reason for optimism is due to the positive correlation that Indian midcaps share with global peers, with the latter being a lead indicator. 2019 was the best year for global equity markets, since the aftermath of the financial crisis, as investors appear unconcerned about US-China trade tensions and warnings of slowing growth in major economies. A report by a leading broker highlighted: "As US and European midcap indices are touching new life-time highs after two-year hibernation, empirical evidence favours Indian midcaps following in their footprint".

While predictions are never easy in markets, what always works is ensuring that that the portfolio is regularly reviewed and balanced to meet your goals, in an ever-changing environment.

Source: Moneycontrol & Various Discussions

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