Small-and mid-cap stocks have outperformed the market, erasing all their losses recorded post-West Asia conflict that began on February 20, 2026.
From their February 27, 2026, level, the Nifty Smallcap 100 index rallied 6.5 per cent, while the Nifty Midcap 100 index gained 2.2 per cent. In comparison, the Nifty 50 index and BSE Sensex are still down by 4 per cent and 4.8 per cent, respectively.
Analysts expect the small- and mid-cap segments to continue their good run and outperform their large-cap peers in the months ahead despite West Asia war-related concerns.
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One reason for the outperformance of small- and mid-cap stocks, believes G Chokkalingam, founder and head of research at Equinomics Research came after a relative underperformance in 2025. The fall in these two segments starting February 2026 triggered by the West Asia conflict, he said, also made relative valuations attractive.
“Another reason is a tepid primary market. Money with retail investors chased secondary market stocks, especially in the small- and mid-cap segments amid a lack of investing opportunities in the primary markets. We continue to suggest investing especially in SMC (small & midcap) stocks on declines. FII selling and rupee weakness relatively have less impact on these stocks; hence, we expect SMC stocks to perform better going ahead,” Chokkalingam said.
FIIs vs DIIs
While foreign institutional investors (FIIs) withdrew about ₹1.7 trillion from the Indian equity markets during the West Asia war period from February 27 till April 27, NSDL data shows, domestic institutional investors (DIIs) supported the markets with an inflow totaling nearly ₹1.9 trillion during this period, data shows.
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U R Bhat, co-founder & director, Alphaniti Fintech does not expect FII flows to come back to Indian shores with ‘animal spirits’ in a hurry. “For them, relative valuations of India versus other markets matter, as do the forex (rupee-dollar) rates. Stocks of companies that can withstand the oil price shock will do well in the short-to-medium term,” he said.
Among the sectoral indices, the Nifty Metal index was the top gainer, surging 6.6 per cent during the period (February 2026 till date). The Nifty Realty, Consumer Durables and Pharma indexes are up in the range of 1 per cent to 2 per cent, data shows.
On the other hand, public sector banks (PSBs) are the top losers, with the Nifty PSU Bank index plunging 11 per cent from the February 27 level. Nifty Auto and Nifty Private Bank indexes slipped 7 per cent each, followed by Nifty Oil & Gas (down 5.6 per cent) and Nifty IT (down 4.6 per cent).
Over the next 12-18 months, Jyotivardhan Jaipuria, founder & managing director at Valentis Advisors, also believes in the 'small-cap story' amid a rebound in the earnings cycle. He expects returns in the small-caps of around 20-25 per cent compounded over the next two years, much faster than the large-cap earnings growth of 16 per cent.
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From a fundamental viewpoint, small-caps trade at a one-year forward PE of 19.8x, in line with the 5-year average of 19.9x, analysts said, but still at a 15 per cent premium to the long-term average of 17.3x. Similarly, on a P/B small-caps trade at 2.4x, below the 5-year average of 2.8x, but at a 10 per cent premium to the long-term average of 2.2x.
“Small-caps' balance-sheets are in much better shape. Given an earnings recovery cycle and improved balance-sheets, we regard this as a reasonable risk-reward proposition despite the valuation multiples," Jaipuria added.