New Delhi: Small and mid-cap stocks are the best performing asset class for the quarter ending March 2021, while gold is the worst performing.
Small and mid-cap stocks returned 14% during the quarter, while gold underperformed with negative returns of 11%. Gold is the most underperforming for the first three months of 2021 compared to other asset classes. Gold prices have fallen 11 percent in rupees and 10 percent in US dollars over the past three months. Aside from âriskyâ trading, the rise in bond yields is now negative in the short term for gold prices
According to Axis Securities, gold has proven to be one of the best performing asset classes in 2020. Over the past 10 years, Nifty has outperformed the emerging market in five years and grown the market in four years.
The performance of small caps is very volatile compared to other asset classes. Small caps ranked at the bottom of the scale in 2018 and 2019 and recovered strongly in 2020, outperforming other asset classes in the first quarter of 2021.
NIFTY50 generated a healthy return of 15%, which was significantly better than the 12% return in 2019. While NIFTY Midcap 100 and Nifty Smallcap 100 generated returns of 22% and 21% respectively in 2020, the returns of mid and small cap indices were negative in 2019.
“We expect the broad rally of 2020 to continue through 2021 (already visible in Q12021) as we believe a strong recovery in earnings across the board is to be expected. A more interest rate environment low and higher budget spending will continue to support equity markets, âAxis Securities said.
He said that trade at a 10 percent premium over large caps. From a valuation perspective, mid caps look attractive relative to large caps. Historically, during the bullish phase of 2017, mid caps traded at a 45% premium over large caps. The recent wave of IPOs and their success is a clear indication of the appetite for small and mid-cap stocks, according to the report.
Since November 2020, small and mid caps have accelerated and are expected to generate strong returns in 2021, as economic uncertainties decrease and volatility decreases.
The report indicates that the dominance of the top 10 stocks is decreasing in the market. Since December 2017, Nifty has recorded a return of 40%. Of these, the top 10 stocks by free float market cap generated an exceptional return of 58%, while the remaining 40 stocks generated only 17%. This gap has started to narrow in recent months. Based on the top 10 stocks, Nifty’s adjusted value stands at 16,647, while the other 40 would lead NIFTY to just 12,354. This indicates that Nifty is better valued beyond the top 10 names. Long-term risk rewards are better in the next 40 names compared to the top 10, according to the report.
A wider rally since November and overall market performance were seen in March despite higher volatility signifying an intact overall risk appetite towards mid and small stocks. Stocks ranked 101-200 were up 2% in March and 98% last year, which is higher than the performance of large caps.
Higher FII flows since November continue to drive momentum FIIs are net buyers; FII added $ 7.8 billion while DII removed $ 3.1 billion from the Indian stock market in the past 3 months. As of January 2020, FIIs have bought a massive $ 30.9 billion while DIIs have sold $ 8.6 billion on the Indian stock market. Highest FII inflows on record in current fiscal year: $ 37 billion, above fiscal 11/10/13 levels.
The year ended on a positive note for equity markets, with all sectors posting positive returns. The report says metals and IT saw the biggest gains while FMCGs saw the slowest growth. Autos and Realty also generated strong returns during the year.
While FY21 was strong, helped by cheap valuations and a weak base, March’s performance was mixed. High beta sectors such as BFSI recorded profits while defensives such as FMCG and Pharma recorded marginal gains.
The report now indicates that investors are betting more on riskier assets like stocks. Sentiments are improving further with growing optimism driven by vaccine development and a faster-than-expected economic recovery.
All of these developments keep gold prices under pressure. Based on these fundamental pressures, gold is the most underperforming for the first three months of 2021 relative to other asset classes. Gold prices have fallen 11% in INR and 10% in USD over the past three months. Aside from âriskyâ trading, rising bond yields are now negative in the near term for gold prices. Basically, gold prices are inversely correlated with bond yields. However, gold will continue to attract investment to hedge risk against other asset classes.
Gold has registered a record inflow of 657 tonnes in the past year, according to the report. ETF flows have contributed significantly to the rise in gold prices since the start of 2020. ETF flows (in tonnes) have jumped to 657 tonnes over the past year, multiplied down 1.3 from last year, in which North America was a big contributor. However, the pace of ETF investment has been moderate in recent months, with cash outflows in February for the third time in the past four months.
Global ETFs posted a 2% loss in their holdings in February due to falling gold prices and rising yields. Gold suddenly lost momentum due to âriskyâ trade in the global market against a backdrop of positive developments on the vaccine front. Stock markets tend to rise due to relief from uncertainty about the US election, vaccination news and the economic recovery. Nonetheless, a low interest rate environment and higher budget spending continue to attract investment in gold, according to the report.