InvestorQ : Is it true that mid cap and small cap stocks have done very well in the month of July 2022 so far?
Katherine Gonsalves made post

Is it true that mid cap and small cap stocks have done very well in the month of July 2022 so far?

rhea Babu answered.
2 months ago

There appears to be a lot of alpha hunting int mid cap and small cap stocks. Just an interesting piece of data here. For the month of July 2022, the net inflows were higher for small cap funds than for mid-cap funds and large cap funds. Clearly, investors are looking at small stocks for alpha in a tough market. Even in the stock markets, the mid-cap and small-cap stocks, rebounding from lows, are outperforming broader indices comprehensively. For July 2022, the BSE mid-cap index gained 10.77% against 8% gains for the BSE Sensex.

Even the small cap indices are not too far behind. For instance, the BSE small-cap index was up 9.16% in July and has gained another 2.31% in the first few days of August 2022. This confidence comes from the belief that investor sentiments have improved and the US interest rates are close to peaking, if not already at the peak. The bet seems to be that, notwithstanding the brave language of the Fed chairman Jerome Powell, the Fed would not be able to hike rates aggressively without impacting growth.

In a sense, the mid caps and the small caps are also playing catch-up with the large caps and trying to reverse the trend of the last few months. Mid caps and small caps took deep cuts in the midst of stock market uncertainty and volatility in the rupee and in oil prices. However, that appears to have stabilized now and that is benefiting the small and mid cap stocsk in a big way. Remember, most of these are small and focussed companies with focussed business models and low levels of leverage. That has also helped.

Consequently, investors have shifted from a more conservative large-cap-oriented stance to a riskier mid-cap stance. Most of the Indian investors today see growth coming from smaller companies. The demand for mid caps is also sector specific with interest coming from logistics, building materials, pipes, realty etc. Most investors are veering around to the view that the headroom for smaller companies to grow is much larger than for bigger companies. Many mid cap companies completing capacity expansions has also worked favourably.

There is a sweet spot. These smaller companies are sitting on lean balance sheets, generating healthy cash, yet trading at reasonable valuations. That is making them attractive to a lot of incisive investors.