New Delhi, Jan 2 The sharp outperformance of small and midcaps in 2023 has led to valuations becoming a challenge now, foreign brokerage Jefferies said in a report.
At 27x 1-year fwd PE, the Nifty Midcap100 index trades at 35 per cent premium to its average valuations, vs a less than 20 per cent premium for the Nifty 50.
"This makes the SMIDs susceptible to a sharp sell-off. We believe that the Budget/approaching elections may disappoint on govternment capex, creating a possible trigger for sell-off in parts of the SMID universe, particularly among industrials, select PSUs etc.," the report said.
After a 25-35 percentage point outperformance by mid/smallcap indices, 2024 could start with a bias rotation towards larger caps.
A reason for SMID outperformance has been the lack of capex plays among the largecaps.
SMID caps offer a bunch of options to play the industrial recovery. Early rotation signs in December has seen largecaps outperforming midcaps. Positioning in financials is light with domestic OWT near multi-year lows. A potential budget disappointment on capex could cause a sector rotation early in 2024, the report said.
The domestic capex cycle recovery is a key theme driving SMID cap outperformance.
The capex plays are important portfolio weights for the medium to long-term investors. However, there is a dearth of such ideas among largecaps with only three Nifty-50 components/5 per cent market cap belonging to this direct capex play (industrial & realty) group.
However, 18-20 per cent of SMID market cap is spread over the industrial and realty companies, necessitating the reach among the lower midcap names to play the cyclical story, the report said.
Disclaimer: This post has been auto-published from an agency feed without any modifications to the text and has not been reviewed by an editor