The NSE Nifty Midcap 100 Index has fallen 12.6 percent so far this year compared with a 5.8 percent gain in the benchmark NSE Nifty 50 Index. But three key indicators suggest that the mid-cap index may have bottomed out and could even rebound.
Mean Reversion
The price ratio of the mid-cap index and Nifty 50 has now reverted to its mean. Having risen from about 1.2 in 2013 to over 2 in 2018, it's back at its five-year average around 1.62.
The mid-cap segment is bottoming out and may catch up with larger peers, Chandan Taparia, associate vice president at Motilal Oswal Securities, said. “While the last calendar year was great for mid caps, this year we have seen a correction. But expect the mid caps to bounce from current levels after base formation.”
No Longer As Expensive
Mid-caps are no longer as expensive as a year ago. The one-year forward price-to-earnings multiple for the 100-stock gauge is now one standard deviation above the five-year average.
The price-to-earnings multiple is shrinking due to a technical reason, according to Chakri Lokpriya, managing director at TCG Asset Management. The new definition of mid cap as per the regulator forced funds to sell, he said. A fear of political and macro uncertainty also impacted mid caps more, he said. “I believe it's time to buy mid caps where we see earnings recovery and improving balance sheets.”
Key Support Level
The mid-cap index is now at a key support level. The current price is close to its 100-week simple moving average. It hasn't traded below this level for more than a few weeks in a row before rebounding in the last 15 years.
This average is playing its part in providing support to the market twice in the last few weeks increasing the possibility of a reversal or at least a bounce, said Hemen Kapadia of KR Choksey.
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