Big Money Moves: Are large caps poised to steal the spotlight from smallcaps?

If economic sentiment improves, small caps could quickly regain favour. But, for now, the tide is clearly leaning toward large caps, as investors look for safer ground.

As large-cap inflows surge and small-cap enthusiasm cools, market watchers are wondering if the small-cap rally is finally losing steam, making way for the blue-chip giants to reclaim the stage.

With investors piling into large-cap funds at rates not seen in months, it seems the market narrative may be evolving—one where safety, valuation, and resilience are taking precedence over high-risk, high-reward plays in smaller stocks.

Hitesh Jain, strategist at YES Securities, has noticed a striking pattern in recent fund flows that suggests a marked change in investor sentiment. Since the market correction began in late September, large-cap stocks have dropped about 8%, while mid-caps have seen similar declines. Small caps, however, have only fallen by around 5%, suggesting they haven't been hit quite as hard in absolute terms.

But there’s more to the story. Fund flows reveal that inflows into small-cap schemes in October were 45% above the six-month average -- impressive, but nothing compared to large-cap funds, where inflows were over 150% higher than their six-month average.

"This shift indicates a growing preference among market participants for large-cap stocks, perceived as more resilient," Jain explains, highlighting that investor appetite is now tilted towards stability in a volatile market.

Stability in uncertain times

For V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the trend isn’t just a flash in the pan; he believes it's a reflection of long-overdue valuation adjustments.

"The overvaluation of small caps and the fair valuation of large caps has been a conspicuous feature of the market," he says.

With flows increasingly concentrated in large and flexi-cap funds, Vijayakumar sees this as a "healthy normalization" that signals the exuberance in small caps may be fizzling out. Investors are now realizing that the frothiness in small caps may not be worth the risk, especially when large-cap blue chips are priced more attractively.

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Samir Shah, Head of Online Business at Axis Securities, echoes this sentiment, attributing the large-cap shift to investor caution amid economic uncertainties. "Small- and mid-cap stocks had a fantastic run last year, but the valuations have now gone beyond comfort levels for many," he explains.

As global economic headwinds gather, investors are increasingly pivoting towards large caps, seeking stability and security in uncertain times. "Large-cap stocks now seem to be the safer and more stable choice compared to mid and small caps," he adds, summing up the sentiment of many who are now flocking to large caps.

Mid and small caps aren't down and out just yet

Another key factor in the market's recent downturn has been the huge selling by foreign institutional investors (FIIs), primarily affecting large-cap stocks, where FIIs hold significant ownership. The cumulative net selling of FIIs in October and November till date is pegged at nearly $14 billion.

Although large-cap declines may affect mid-and small-cap stocks, this doesn’t necessarily mean small-caps will underperform, said Hitesh Jain

Despite the shift in favour of large caps, Deepak Jasani, Head of Retail Research at HDFC Securities, advises against counting small caps out just yet. "Small and mid-cap space provides the highest alpha, and at the first signs of stability, flows could resume into these," Jasani notes.

While there is a clear cooling in smaller caps, the long-term potential for high returns could still attract investors if the economic picture stabilizes.

Jathin Kaithavalappil, Assistant Vice President at Choice Broking, adds a note of caution, suggesting that it is too early to declare an end to the small-cap momentum. If economic sentiment improves, small caps could quickly regain favour. But, for now, he agrees, "the tide is clearly leaning toward large caps, as investors look for safer ground."

What’s next?

The market’s direction over the coming months will likely hinge on Q3 earnings, with improvements in personal consumption, rural demand, and capital expenditures potentially reigniting interest in small caps. But, for the moment, the strong inflows into large caps tell a story of caution and pragmatism.

It seems investors may be willing to trade a bit of potential alpha for the relative safety of large caps. Whether this shift marks the end of the small-cap rally remains to be seen, but one thing is certain: the momentum is unmistakably favouring the market’s giants, at least for now.

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