Indicators skewed towards possible correction for small cap stocks

New Delhi: August saw continued outperformance of the small/midcap space over large caps while the small cap indices have rebounded more than 40 per cent since the March bottom, and tactical indicators are skewed towards a possible correction, Bandhan Mutual Fund said in a report.

“Overall, we are overweight on domestic sectors like Auto, Industrials, etc., but valuations have become rich, and we are heading into the election period; hence, we must carefully manage the domestic cyclical part of the portfolios.

"While small caps may see a tactical correction from a medium to long-term perspective, we see interesting opportunities in the space given the country’s healthy economic growth, vibrant corporate sector and strong domestic liquidity," the report said.

The Nifty ended its five-month positive streak in August.

The index fluctuated 572 points before closing at 500 points (or 2.55 per cent) lower MoM at 19,254. The Nifty is up 6.56 per cent in CY23YTD, Tata Mutual Fund said in a report.

The Large caps saw some profit booking and consolidation in August. All major sectors ended lower last month. Energy, Financial services and Banks declined the most while media and IT gained for the month.

For the year ending August 23, PSU Banks (+49 per cent) and Realty (+20 per cent) made the highest gains while Energy (-8 per cent) was the biggest laggard, the report said.

August 2023 was a weak market for Large caps post a sharp return phase. However, Mid and Small caps continues to deliver alpha.

Strong momentum in the small cap segment supported by broadening of economic growth and large domestic flows in dedicated funds, the report said.

According to Motilal Oswal Asset Management Company (MOAMC)’s Global Market Snapshot report, Nifty Smallcap 250 outperforms all major indexes in August. Nifty 50 dropped 2.5 per cent in August due to a slowdown in FPI investment and rising U.S. bond yields.

However, mid and small caps stole the spotlight by surging 3.9 per cent and 5 per cent, respectively.