Is it time to move out of small and mid-cap stocks?

The valuation gap between S&P BSE Small Cap Index and the Sensex is at an all-time high

Published 7 years ago on Jun 26, 2017 1 minute Read

Tushar Pradhan, CIO, HSBC Global Asset Management

According to Bloomberg, the S&P BSE Small Cap Index trades at 50.73x its FY17 earnings versus the 23 multiple on the Sensex. However the real clincher is the estimates of earnings growth for the next year. Bloomberg estimates a consensus earnings growth of nearly 143% for the S&P BSE Small Cap Index. Thus one year forward earnings multiple for this index comes to 20.84 as opposed to the Sensex multiple of 19.04 as of June 20th. One may argue that the estimates are too rosy but the valuation appears reasonable on a comparable basis. More than 30 largest companies in this index are set to grow earnings by at least 100% in the coming year. So, one should look at the current valuation in this context. Typically investors seek earnings growth and are willing to shell out a premium for holding on to growth shares.

Ambareesh Baliga, independent market expert

The gap between the valuations of mid and large caps has expanded quite sharply. There is a lack of convincing value picks whereas liquidity is chasing momentum which the small and mid caps are providing. When the sentiment is good, the markets tend to ignore weak macro fundamentals. However, currently we are not witnessing any improvement in real employment levels, income levels for farmers, one of the key drivers of consumption. Inflation is more benign but could be because there is no real growth in the economy. I think GST is going to definitely disrupt the economy for a quarter or two and the earnings of mid and small-companies are likely to be more impacted. I foresee a sharp market correction in which the small and mid-cap will be the ones most affected. So it makes sense to shift to large caps or stay in cash.