Why Jefferies likes midcap, smallcap shares, its top stock picks & more

Foreign brokerage Jefferies said it likes the small and midcap (SMID) space, as the space has higher share of domestic economy stocks and also two times the share of its favourite property and industrial stocks. Large cap stocks, Jefferies said, have very few options to play investment cycle and spillover of demand to small and midcap cap stocks can drive a large outperformance.

Jefferies said private capex and housing cycle are at initial stages (2 years) of what is typically a 6-8 year cycle. As such, the capex plays hold key in Jefferies' portfolio weights for the medium- to long-term investors. But, it said, there is a dearth of such ideas among large caps with only three Nifty components and 5 per cent market cap belong to this direct capex play (industrial & realty) group.

The midcap and smallcap indices are up 11-12 per cent this year against a 4-5 per cent rise in Sensex and Nifty. Jefferies said domestic capex cycle recovery is a key theme driving the midcap and smallcap outperformance, with financial, industrials and property contributing 51 per cent of midcap index gains year-to-date.

A total 70 per cent of the 96 industrials and realty stocks among NSE500 have delivered higher gains than the median gain of 6 per cent," it noted.

The foreign brokerage said 18-20 per cent of SMID market cap is spread over the industrial & realty companies, necessitating the reach among the lower mid cap names to play the cyclical story.

Jefferies citing historical data while suggesting that midcap volumes track price performance quite closely. The volume share of midcap stocks is currently inline with its 10-year average of 30 per  cent; below the peak seen earlier in late 2021, despite midcap index being at new highs.

"Our overall market volume analysis also shows that non-institutional volume share at 77 per cent, is inline with average. As such, we believe direct retail participation has yet to rise substantially in the current SMID rally," it said.

Jefferies said its is overweight on capex plays. It is overweight on industrial and property sector within ots model portfolio with a combined 7 percentage points overweight OWT. It likes industrials such as Larsen & Toubro (L&T), Siemens Ltd, ABB India Ltd, Thermax Ltd, Blue Star Ltd, Bharat Electronics Ltd, TCI Express Ltd, KEI Industries Ltd, Polycab India, Supreme Industries, Kajaria Ceramics and cement maker Dalmia Cement. Among property, Lodha, Godrej Properties, DLF and Prestige are its preferred stock picks.

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