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    Midcaps and smallcaps will be in a sweet spot for next 3-4 years: Nilesh Shah

    Synopsis

    ‘You are really going to see this space march ahead versus the very obvious popular benchmarks and popular indices’

    ETMarkets.com
    Mid and smallcap space essentially is coming out of a very long period of underperformance.
    Some of the sectors which represent the broader economy and which have underperformed will start to pick up, says Nilesh Shah, MD & CEO, Envision Capital.

    Typically, when the market sees a great return, you always see midcap stocks start catching up. Are we in for that kind of a pitch where individual stock pickers like you will now start outperforming?
    That is the way the market direction is likely going to be and that is how the set of opportunities are going to come up. There are two to three prime factors that will in a way drive the markets and gravitate it more towards the broader side of the market.

    One, it has become fashionable now to start putting money through ETFs and through passive investing and when a particular strategy plays out really well, it probably is towards the strategy that starts to get mature. This kind of starts diminishing marginal utility which starts to play out. So my sense is, that is the first factor.

    The second factor essentially is that the mid and smallcap space essentially is coming out of a very long period of underperformance. So we broadly look at it post 2017, 2018, 2019 and to some extent a very large part of 2020. These three years put together, the mid and smallcap space has underperformed.

    The third thing is that I strongly believe that we are now set for a very broad-based recovery in the economy and in terms of the GDP growth. So far, essentially the capex cycle, the investment cycle, the discretionary spending by consumers all had taken a back seat over the years. But what I am now beginning to see are those initial signs of essentially the whole Atmanirbhar programme becoming more followed up by a sense of Atmavishwas among both producers as well as consumers.

    So to that extent, it makes me believe that some of the sectors which represent the broader economy and which have underperformed will start to pick up. I probably believe that it is just the beginning. The party has just started and my sense is that over the next two to four years, you are really going to see this space march ahead versus the very obvious popular benchmarks and popular indices.

    A lot of factors have to come together for the party to continue. The Cinderellas of the world are saying mid and smallcap companies do not have the ability, capability and the scale to grow. The migration is happening towards large companies. Whatever market share gains are happening are happening because smaller players are losing market share. So while it is logical to understand that Nifty 50 has rallied and now the broader market has to participate, can one argue back that this time the conditions are very very different?
    Typically, if it is a mature sector, maybe the scale matters quite a lot and the big keeps getting bigger and bigger versus when you basically see that the sector is likely to witness some kind of superlative growth or hyper growth. Of course, that lifts all boats and I think the leaders, the larger players and midsized players tend to essentially do well.

    The third thing is that when we kind of really talk of mid and smallcaps, we are talking more from a market capitalisation point of view. But that does not mean that these companies are tiny. For example, you could pretty much have a company which has more than Rs 10,000-12,000 crore of marketcap and still get classified as a midcap company and not a largecap company, but a Rs 10,000-12,000 crore market cap is not small or midsized by any stretch of imagination. This is a company which could even have Rs 5,000-10,000 crore of revenues. So to that extent, yes. From a stock market point of view and an investing perspective, you could classify these kinds of companies as mid-sized, but essentially they are leaders in their chosen space.

    I clearly believe that that is where the opportunity lies. There is relative under ownership and there is relatively less tracking and I think they have the potential to surprise you. In terms of growth, these are companies and businesses which could deliver growth in the high teens or maybe even low double digits and that makes them a very interesting set of opportunities. That is why this is really the segment which is going to be the sweet spot over the next two to three years or two to four years.
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    11 Comments on this Story

    Vikram Aditya24 days ago
    Time has come to Indigenous MSME sector to believe in the buyer and producer in order to compete in the international market be it 1000 Cr or 10k Cr Company listed or non listed just make a product that it sustainable and dependent and cost effective both domestically and globally As growing FDI/INFRASTRUCTURE/ TECH SKILLS /5G//AI More important is As the Western forces in mood of ABC ( anything but Chinese) is a Mantra for Indian sector success for a Upcoming decade, As Indian Industrial sector has every capabilities from Vaccines to Akaash missile system /Sanitizer to affordable Space mission / From Middle East to ASEAN &From Arabia Seas to Bay of Bengal lastly Indian Ocean to Pacific Oceanic region??
    Shashank Mishra49 days ago
    BULL MARKET HAS JUST STARTED
    May 51 days ago
    good insight, good article. I am planning to short as future events after December looks bearish.
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