Indian midcap, smallcap stock rally in 2024 is the best in the world

In CY24, the NSE’s mid-cap and small-cap indices have surged by 25.7% and 26.7% each.

In 2024, the performance of mid and small-cap indices in India has outshined global FTSE benchmarks and surpassed competitors in major stock markets worldwide, making it the top performer globally.

Despite the recent correction in the mid and small-cap sectors due to valuation worries and geopolitical uncertainties, there is still a sense of apprehension looming before the upcoming July-September 2024 (Q2-FY25) corporate earnings season.

The FTSE Global Mid Cap index and FTSE Global Small Cap indices have both seen growth of 12% and 9.3% correspondingly, according to Bloomberg data. In contrast, the FTSE Global India Small Cap index has excelled, boasting a remarkable 25.2% increase in CY24. Domestically, the mid-cap and small-cap indices on the NSE have also shown strong performances, with gains of 25.7% and 26.7% in CY24.

Part of a series of indexes aimed at aiding investors in evaluating their global investments, the FTSE Global Mid/Small Cap Index consists of mid and small cap stocks sourced from various regions worldwide. Derived from the comprehensive FTSE Global Equity Index Series (GEIS), which represents 99% of the world’s investable market capitalization, this index offers a diverse perspective for investors.

The FTSE Germany Mid Cap Index showed the highest increase among global mid-and small-cap indexes, recording a surge of 20 percent. Notable gains were also seen in the FTSE South Africa Mid Cap Index (up 14.6 percent), FTSE Japan Mid Cap Index (10.7 percent), FTSE Global South Africa Smallcap (20.2 percent), FTSE Global Taiwan Small Cap Index (12.1 percent), and FTSE Greater China Small Cap Index (6.5 percent).

V K Vijayakumar, chief investment strategist at Geojit Financial Services, suggests that the current trend of large-cap stocks surpassing mid-and small-caps in India is expected to persist. He advises investors against hastily purchasing undervalued stocks from the mid-and small-cap categories, cautioning that there may still be further challenges in these sectors, particularly with persistently high valuations. However, he does acknowledge the possibility of specific instances of rapid recovery.

Amid predictions of lackluster earnings growth in the upcoming quarters, analysts had been warning about the sudden surge in midcap and smallcap stocks in India driven by liquidity.

Bernstein analysts warned in April 2024 about the significant gap between earnings growth and stock valuations, particularly noticeable within the small and mid-cap (SMID) sector.

Venugopal Garre, alongside Nikhil Arela, highlighted in their collaborative note from April 2024 that sectors experiencing favorable earnings upgrades tend to witness a significantly pronounced fluctuation in their stock values, indicating a prevailing sense of optimistic overvaluation. This disparity exceeds 30% across various sectors, with the IT sector notably recording a considerable uptick in stock performance as 50% of its stocks demonstrated positive returns despite the absence of any FY25 earnings upgrades over the past three months.

According to Sameet Chavan, the head of technical and derivative research at Angel One, there has been a significant downturn in the midcap sector recently. This decline has breached crucial support levels, indicating further challenges ahead. Chavan advises against seeking bargains in this area at the moment.