India's small and mid-cap stocks face challenges to sustain outperformance

• Considering the overall market consolidation, it's not an ideal environment for investing in high-risk categories, says an expert.
• The negative factors are the surprising strength of the dollar index and now, the Brent crude at $90.
• The rally in IT stocks has contributed to the resilience of the market.

The Nifty Smallcap 100 index has rallied 30%and the Nifty Midcap 100 index is up almost 28% year-to-date. Comparatively, the benchmarks - Nifty and Sensex - are up 7.4% and 7.3% in the same time period. However, market watchers say that maintaining this momentum for the smaller stocks will be a tough ask in the days to come.

Says Vinod Nair, Head of Research at Geojit Financial Services, "There has been strong performance in the short term by mid and small-caps, sustaining this in the near term may pose a challenge."

He adds that considering the overall market consolidation, it's not an ideal environment for investing in high-risk categories, he said.

Valuation of mid and small-caps remain appealing when compared to the trends of the past seven years. Specifically, small-caps appear to be even more attractive than mid-caps in the current scenario.

"Our view is that India is now more of a stock to sector play. We anticipate that the category as a whole will outperform in the medium to long-term," he said.

V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services said for the near-term, there are mixed cues for the market. The negative factors are the surprising strength of the dollar index at 104.86, the resilient bond yields in the US (the 10-year at 4.26), and now, the Brent crude at $90. The spike in crude is a major macro concern.

In this scenario, the FIIs are likely to continue selling in the cash market. On the positive side, the sustained DII buying is imparting strength to the market. DIIs have bought stocks worth Rs 5,934 crore in the cash market during the last three trading days of September, he said.

Retail investors are also buying, and this 'buy on dips' strategy has worked. The rally in IT stocks has contributed to the resilience of the market. IT and the fairly valued banking stocks, particularly the leading private banks, have the potential to support the market. But investors have to be cautious about the headwinds, particularly the rising crude, he said.

With text inputs from IANS