After starting the year on a negative trend, midcap and smallcap indices outperformed Sensex and Nifty last month amid hopes of return of the Modi government.
The Nifty Midcap index has surged over 4.5 percent in the last one month, while the Nifty Smallcap index has rallied nearly 8 percent. In comparison, Nifty50 rose 2 percent in the given period.
The gains came after the indices lost nearly 5 percent in January. Nifty Smallcap fell 4.9 percent in the January 2019, while Nifty Midcap slipped 5.9 percent underperforming the frontline indices. These indices were negative for the month of February as well.
However, most of the gains came in the last week of February amid rising India-Pakistan tensions post the Balakot air strike conducted by the Indian Air Force in Pakistan. Since February 26, the midcap index has gained 4.7 percent and the smallcap index rallied 7.7 percent.
Analysts now believe that the worst may be over for the midcap and smallcap space and investors can build a portfolio with quality stocks in these segments. Pankaj Tibrewal, fund manager at Kotak Mutual Fund expects small caps and mid caps to outperform over the next 12-18 months.
Gautam Sinha Roy of Motilal Oswal AMC is also optimistic on the beaten down space. "After a very long prolonged correction, there were opportunities in the midcap and smallcaps space and investors are coming back. Money is coming back into markets and that might have to do with the prospects of election results. This money had started going out exactly one year back after the budget of last year," said Roy, a fund manager at Motilal Oswal told CNBC TV18.
As many as 98 stocks in the Nifty Smallcap 100 index were positive in the last one week, out of which, 46 stocks gained between 10-45 percent. Stocks which gave double-digit returns included names like Suzlon Energy (44 percent), Repco Home Finance (34 percent), J&K Bank (27 percent), CG Power (20 percent), MOIL (18.3 percent), Manpasand Beverages (18.2 percent) and Gujarat Alkalies (18 percent). NCC, Ashoka Builcon, Oriental Bank, Jaiprakash Associate, MMTC, Philips Carbon, IDFC, Delta Corp, Can Fin Homes also gained in the range of 11-17 percent.
In the Nifty Midcap 100 index, 24 stocks gave double-digit returns in the last one week, while overall 90 stocks gave positive returns. Dilip Builcon, Reliance Power, Edelweiss Financial Services, Dewan Housing, National Aluminium, IDFC Bank, Punjab National Bank, Reliance Capital and Union Bank of India rose between 14 to 34 percent.
But according to experts, investors must take a stock specific approach while investing in the broader markets. Investors should only invest in companies that are not linked to any political party, have a robust business model, strong earnings, visible cash flow, and low debt.
"There has been a huge divergence of performance between frontline and broader indices in the last 12-13 months and history suggests that post such kind of divergences, normally smallcap and midcaps tend to outperform. The recent rally is more of a normalisation as the midcap and small caps had become attractive on valuation,” Tibrewal told CNBC-TV18.
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