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As small and mid-cap stocks outperform large caps, the NSE Midcap 100 and Small 100 indices have generated continuous positive monthly returns amid the pandemic.

According to the India Strategy report of Motilal Oswal Financial Services, "The NSE Midcap 100/NSE Smallcap 100 indices have generated consecutive positive monthly returns of 102 per cent/67 per cent in the last 13 months/8 months."

It noted that this is the best such period of consecutive months of positive returns for the NSE Midcap 100. The Nifty Smallcap 100 has bettered this only once in the past.

"The NSE Smallcap 100/NSE Midcap 100 index has outperformed the Nifty in 10/9 out of 12 months respectively."

Nifty's underperformance in comparison to the midcap index on a 12-month rolling basis is at the highest levels since the global financial crisis (GFC).

For the Smallcap index, this rolling 12 months underperformance is at the same level as during the GFC, it said.

The recent broad-based rally has led to a sharp increase in m-cap contribution from the midcap and smallcap universe. The m-cap of the NSE Midcap 100 index now contributes 12.1 per cent to overall m-cap, up from 9.8 per cent in March 2020.

The sharp outperformance of midcaps, bolstered by healthy earnings, improved sentiments, benign liquidity, and low cost of capital, has more than bridged the valuation gap in comparison to large caps.

Meanwhile, balance sheets and cash flows have improved in FY21 as corporates tightened costs and deleveraged. Consistent earnings delivery versus expectations is critical for further outperformance. Any risk-off owing to concerns over potential interest rate hikes may impact midcaps/smallcaps more in the view of MOFSL.