Despite a recent decline, where small caps have shown no returns in the last 90 days and mid caps have experienced corrections recently, their performance over the past 12 months still surpasses that of large caps, with returns exceeding 50%, says market expert.
According to Equity market outlook – March 2024 report by Anand Rathi, the impressive progress over the last year can be credited to a recovery from the notable underperformance seen in 2018-19, as well as again in 2022. This recent surge is better understood as a catch-up rather than an abnormality.
Looking ahead, the report said that Nifty50 is expected to deliver 16% earnings growth in 2024-25 and Nifty large cap 100 is expected to register similar earnings growth. However, earnings outlook for small caps looks the best among all (large, mid, small) for 2025-26.
“The large cap indices are likely to deliver slightly better than average earnings growth in 2024-25. The small cap index is likely to deliver the best earnings growth in 2025-26. Mid cap earnings growth expectation is below its long-term average,” said the brokerage firm.
During Oct-Dec’23 results season, both Nifty 50 and Nifty large cap 100 delivered better than expected results. Earnings growth of both Nifty mid cap 150 and Nifty small cap 250 were slower than large caps. However, mid caps did better than small caps.
“Even if we assume fair PE multiples of the respective indices would be significantly lower than the average forward PE multiples during similar phases of business cycles in the past, we do not observe any major froth in the Indian equity markets currently. On the contrary, Nifty small cap 250 seems to be trading significantly below the fair valuation,” it added.
A major correction looks unlikely
The report further suggests that up to 10% correction within a year is common and such an event cannot be ruled out. On an average, market recovers from such corrections within two months.
“While relatively small short-term market corrections are possible, we do not see reasons for significant market correction,” it said.
Past data shows that within a year, market sometimes corrects sharply. Both FII and MF flows to the Indian equity markets have been substantial in March 2024, it added.
