Sharp outperformance of small and midcaps in 2023 makes valuations a challenge
![](https://portfolio.investmentguruindia.com/uploads/news/stock 123456.jpg)
Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel
https://t.me/InvestmentGuruIndiacom
Download Telegram App before Joining the Channel
The sharp outperformance of small and midcaps in 2023 has led to valuations becoming a challenge now, foreign brokerage Jefferies said in a report.
At 27x 1-year fwd PE, the Nifty Midcap100 index trades at 35 per cent premium to its average valuations, vs a less than 20 per cent premium for the Nifty 50.
"This makes the SMIDs susceptible to a sharp sell-off. We believe that the Budget/approaching elections may disappoint on govternment capex, creating a possible trigger for sell-off in parts of the SMID universe, particularly among industrials, select PSUs etc.," the report said.
After a 25-35 percentage point outperformance by mid/smallcap indices, 2024 could start with a bias rotation towards larger caps.
A reason for SMID outperformance has been the lack of capex plays among the largecaps.
SMID caps offer a bunch of options to play the industrial recovery. Early rotation signs in December has seen largecaps outperforming midcaps. Positioning in financials is light with domestic OWT near multi-year lows. A potential budget disappointment on capex could cause a sector rotation early in 2024, the report said.
The domestic capex cycle recovery is a key theme driving SMID cap outperformance.
The capex plays are important portfolio weights for the medium to long-term investors. However, there is a dearth of such ideas among largecaps with only three Nifty-50 components/5 per cent market cap belonging to this direct capex play (industrial & realty) group.
However, 18-20 per cent of SMID market cap is spread over the industrial and realty companies, necessitating the reach among the lower midcap names to play the cyclical story, the report said
![](https://portfolio.investmentguruindia.com/uploads/news/Indian Railways_54.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/ICICI Direct IMAGE.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/shrey jain.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/Kedia Advisory.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/persistent37.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/indianshare1.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/HDFC Securities.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/Axis Securities Ltd.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/electric car.jpg)
![](https://portfolio.investmentguruindia.com/uploads/news/kotak37.jpg)