Micro and mini caps are more expensive now than ever, says this analyst

Nilesh Shah of Kotak Mahindra AMC believes micro and mini caps are more expensive now compared to historical valuations, and their market capitalisation in percentage terms is higher than what it was in 2007.

"People are buying micro caps, mini caps based on momentum, not based on fundamentals. There are always exceptions to the rule. So, some of the micro caps, and mini caps are probably reflecting their fundamental values. But when we look at them, as a percentage of market cap, as a percentage of large-cap valuation, and as a percentage of their own historical average valuation, clearly there is a red signal," Shah told CNBC-TV18.

He said no one knows when the momentum will end. "But everyone knows that if you buy without a margin of safety, then we will have to hold these stocks for a long period of time to make money.”

Shah added that people are buying micro caps and mini caps based on momentum.

The year 2023 so far well and truly belongs to the broader markets that have been in a league of their own. Even as benchmark indices have struggled from time to time, the Midcap and Smallcap indices have continued to rally unabated. In fact, both are even trading at record highs currently. For the year, the Nifty Midcap index is up nearly 25 percent.

This is the strongest eight-month performance for the Nifty Midcap index over the last six years, excluding the Covid-19 year of 2020.

On emerging markets, Shah said investors don’t have many options other than India. “Russia knocked itself out of investor radar by invading Ukraine. China is struggling with the property bubble and has also cracked down on entrepreneurship, especially in the technology sector. South Africa, Brazil, and Turkey, all have scored different kinds of self-goals. Put together these two things: fundamentals are good and others are scoring self-goals. Effectively there are not many options for an emerging market investor but to invest in India,” he said.