Midcaps likely to underperform in 2023 on broadening downgrades, says Nuvama

Midcaps were almost in line with the benchmark in 2022. While the Nifty rose 4 percent in 2022, the Nifty Midcap 100 added 3.5 percent during the year. Smallcaps, however, massively underperformed the frontline indices, down over 12 percent in 2022.

Going ahead, brokerage house Nuvama expects both midcaps and smallcaps (SMID) to underperform benchmarks in 2023 on the back of broadening downgrades.

“We expect earnings slowdown to broaden heron. This is likely to weigh on mid-caps earnings more adversely… Hence, we continue to have a large-cap bias and recommend a move towards leaders,” it said.

Midcaps in 2023

As per the brokerage, market share consolidation and shift from unorganised to organised has been the key market theme over the last five years. This shift has benefitted midcaps more than largecaps as small shifts in their market share can result in much stronger demand and profit bounce, noted Nuvama. However, the environment is now changing with market share tailwinds behind and liquidity tightening. This typically tends to hurt listed companies; within it, the smaller and inefficient ones a lot more, the brokerage pointed out.

In 2022, domestic growth held up despite the global slowdown. This is the main reason domestic-oriented midcaps have outperformed the global ones and have delivered a better earnings trajectory, explained the brokerage.

However, going ahead, challenges are likely to persist in 2023. Risks pivot from de-rating to downgrades, which will weigh on the midcaps, said Nuvama.

Most experts advise investors to pick stocks after doing a thorough analysis of the company’s financials and its industry standing. They advise picking quality stocks that are available at reasonable valuations irrespective of their market cap.

It is important to note that while midcaps and smallcaps can provide better returns than largecaps at times, they also come with extremely high risk. Investors with a risk-averse appetite should stay away from such stocks or invest a very small portion of their portfolio in them. Such stocks are more suited for high-risk investors. One must always consult their financial advisor before making any investment decisions.

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Key parameters to consider before buying midcap stocks

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