Indian stock market: Rally to continue or consolidation ahead? Experts reveal strategy for Nifty 50, midcaps, smallcaps

The Sensex and the Nifty 50, the key indices of the Indian stock market, hit fresh record highs in intraday trade on Friday, August 30. The Sensex reached the milestone of 82637, while the Nifty 50 made a fresh peak of 25,258.80. The BSE Midcap and Smallcap indices rose almost a per cent each and the total market capitalisation of companies listed on the BSE surged to a record high, nearing ₹465 lakh crore.

Nifty 50 has been in the green for the last 12 consecutive sessions despite concerns over stretched valuations. Expectations of a rate cut, the prospects of solid economic growth amid a healthy monsoon and the strong influx of retail investors are driving the market. Moreover, foreign institutional investors (FIIs) have also resumed buying Indian stocks as the start of the rate-cut cycle nears.

The market faces several tailwinds but also significant concerns. Geopolitical tensions, elevated valuations, and unimpressive Q1 earnings remain key overhangs. Additionally, a shallow rate cut and the outcome of the US Presidential Election could significantly impact global markets.

It is difficult to predict the course of the market, but experts say investors should brace for volatility. There is a chance that the market will see some corrections. However, these corrections are not expected to be deep and will eventually remove the froth from the market.

Mint consulted several experts for their insights on the Nifty 50, as well as the midcap and smallcap segments. Here’s what they said:

Strategy for Nifty 50

Manish Chowdhury, Head of Research, StoxBox

With the Nifty 50 sustaining above the psychological 25,000 mark, the benchmark index looks poised to move further in the short to medium term.

“We may not be surprised to see the benchmark index moving towards 26,000 levels in the September series on prospects of a rate cut from the US Federal Reserve and the RBI in the coming months,” said Chowdhury.

The resilience of large-cap stocks, receding nervousness surrounding Middle East tensions, benign crude oil prices, and good monsoon in India would support the overall market sentiment.

“We advise to be constructive on markets, and any dips should be used as a buying opportunity, with IT, NBFC and real-estate sectors expected to outperform broader markets in the short to medium term,” said Chowdhury.

Hardik Matalia, Derivative Analyst, Choice Broking

The Nifty 50 Index is trading near its all-time high levels, showing considerable strength by sustaining above the near-term hurdle of 25,200.

The index has closed above the critical 25,000 mark for four consecutive days, indicating the prevailing bullish sentiment. The sustained performance above key resistance levels reflects the positive momentum in the market and growing confidence among investors.

“Given this positive technical setup, we should adopt a ‘buy on dips’ strategy. Investors should consider accumulating positions on any pullbacks toward the 25,050 level, taking advantage of the strong support and the expected continuation of the uptrend. The immediate targets are set at 25,350 and 25,500, achievable if the current momentum persists,” said Matalia.

“It’s important to stay vigilant. Closing below the 24,950 level would warrant caution as it could indicate a potential shift in market dynamics. Until then, the outlook remains bullish, with a favourable risk-reward profile for those looking to capitalize on the ongoing strength in the Nifty 50,” Matalia said.

Shrey Jain, Founder & CEO, SAS Online

According to Jain, the Nifty 50 index has strong support at the 25,000 level. A break below this level may take Nifty 50 to 24,700. On the upside, 25,300 and 25,500 targets are still open.

“Nifty 50 index may take some cue from Nifty Bank soon. Nifty Bank is moving sideways and still far below its previous high. It has already filled the gap on August 5, 2024. Avoid shorting Nifty aggressively. Buy-on-dips should reward disciplined traders with strict stop loss,” said Jain.

Strategy for mid and smallcap segments

Ajit Mishra, SVP- Research, Religare Broking

The broader indices have regained their record highs despite concerns about valuations, primarily due to the outperformance of a few select stocks, as evidenced by the daily market breadth.

Mishra believes this selective participation will likely persist, supporting a positive outlook for the indices. However, the pace of gains may be more gradual.

“We recommend maintaining a selective approach in the mid and smallcap segments, focusing on themes gaining significant interest and offering appealing valuations. Additionally, investors should avoid increasing their positions in loss-making stocks with the expectation of a rebound,” said Mishra.

Kunal Mehta, Associate Director at Equirus

Mid and small-caps have been on a tear now for more than 12 months. One needs to be very cautious and selective while investing in them.

“As they say, the worst of the mistakes happens in the best of times. Relative valuation can be a safer strategy to follow at such times,” said Mehta.

“Switching within the same sector to companies that offer a margin of safety, for example, a cement company getting acquired for $120/ton while a similar peer in the same geography is available at $60/ton,” Mehta added.

Mythili Balakrishnan, Co-fund manager, Alchemy Capital Management

The rally in small and mid-cap companies is primarily driven by robust earnings growth.

“Over the past five years, Nifty 50 companies have achieved a 17 per cent EPS CAGR, whereas Nifty Midcap 150 companies have seen a CAGR of over 20 per cent and Nifty Smallcap 250 have seen a CAGR of more than 25 per cent,” Balakrishnan observed.

“Moving forward, analysts forecast that the EPS for Nifty Midcap 150 and Nifty Smallcap 250 indices will grow at over 20 per cent for FY24-26, in contrast to around 13 per cent for the Nifty 50. (Source: Bloomberg, Ambit Capital Research),” Balakrishnan pointed out.

She pointed out that this growth differential contributes to these stocks’ premium valuations and ongoing rallies. Additionally, the small and mid-cap indices have greater exposure to high-growth sectors such as defence, EMS, and real estate, which are attracting significant investor interest. However, we recognize that increased liquidity from retail flows is also fueling the rally in small and mid-cap stocks.

“In our opinion, investors’ fund allocations and investment strategies should be aligned with their long-term goals and risk appetite, having taken into consideration the advice of their financial advisors,” said Balakrishnan.

“They should avoid being influenced by short-term market fluctuations. While small and mid-caps have delivered strong returns over the past year and tend to outperform large caps in the long term, going forward, investors should have reasonable expectations of returns,” Balakrishnan said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.