Investors are trying to assess their opportunities in mid-cap and small-cop stocks, which slipped last year even as the Sensex and the Nifty broke records.

A section of the market feels with valuations of some frontline stocks expensive and the government likely to undertake more reforms, this calendar year will be good for the mid and small-caps. Others, however, say action in 2020 will be limited to a few counters.

“The FIIs have invested around $6 billion in the last three months. The markets have been polarised as a few stocks have been driving the markets upwards given the fact that the FIIs have limited mandate to invest beyond large caps and quality companies. Investors herding to large caps have stretched the valuations of the small basket of stocks sought after by the FIIs,” a note from Axis Securities said.

The brokerage said investments would spill over to the broader market, thereby making the rally broad-based with participation from quality mid-cap performers.

In 2019, while the Nifty mid-cap index fell around five per cent, the small-cap index was lower almost 11 per cent. However, the Sensex rose over 14 per cent despite the economy remaining under the grips of a slowdown.

For investors, mid-caps had brought good returns between 2015 and 2018 where it had even outperformed the large caps. However, disappointing news such as the economic slowdown and the IL&FS crisis prompted investors to focus only on quality companies.

According to analysts at ICICI Securities, quality stock selection approach will continue to find favour rather than an index-specific strategy.

Amar Ambani, senior president and research head (institutional equities) at Yes Securities, says, “The broader market (mid and small caps) have been in a consolidation phase since the start of 2018. The mid-cap rally that ended in 2018 is likely to further consolidate in 2020 and a recovery may coincide with the economy gaining steam.”

“For now, even as consumption has slowed, private investments are unlikely to gain momentum as capacity utilisation levels still hover around 74 per cent. Corporate tax incentives will only help in the medium to long-term,” Ambani observed.