Large-caps rule near-term strategy, but long-term belongs to mid-caps, small-caps

Market participants believe over the longer term, broader market might have better opportunities to spawn superior returns

With investors sticking to large-caps for the near term, the expectation is that mid-caps and small-caps would steal the limelight in the long run.

In the past six months, Nifty 50 has risen 12 percent, whereas Nifty Midcap 100 and Nifty Smallcap gained 12 and 11 percent respectively. But in the past one month, Nifty 50 and Nifty Midcap 100 are down 2 percent but Nifty Smallcap 100 fell 3.5 percent.

The Indian markets outperformed most global peers last year, fuelling hopes that the market could see some mean reversion.

Santosh Meena, Head of Research, Swastika Investmart, thinks underperformance and volatility would rule the market this quarter. “In the near-term, we may see some pressure on large-cap stocks due to continuous selling by foreign institutional investors,” he said.

Read: This smallcap stock is up 40% in 5 days; what do charts hold?

For 2023, Jefferies has recommended a bottom-up approach in the broader market with key themes like capex revival, housing and PLI. It suggests staying selective in the broader market.

Market participants believe over the longer term, broader market might have better opportunities to spawn superior returns.

“Despite the correction in 2022, midcaps are still expensive. The Nifty Midcap 100 is at a significant premium of 30 percent to its long-term average. High inflation, tightening monetary conditions and fear of recession in the US and Europe will keep the midcap under pressure,” said Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities.

Read: Aditya Birla Sun Life’s Mahesh Patil prefers domestic facing cos over global cyclicals

Over the past two-three years, the macro economic environment was quite uncertain because of the Covid pandemic, geopolitical crisis, runaway inflation and unprecedented policy tightening by most central banks, and larger companies are usually better equipped to brave such headwinds and, hence, display better resilience in terms of their earnings, Chouhan said.

He, however, went on to say that the macro challenges will wane away in the longer run and the broader economy is expected to do well, which could help small-cap and mid-cap stocks outperform large-caps over the longer term.

“We are witnessing this in mid-sized banks and we should gradually see the other sectors participate as well. A broad-based economic growth environment is usually a good time for investing in mid- and small-cap segments,” he said.

Mahesh Patil, Chief Investment Officer, Aditya Birla Sun Life AMC, too, has a similar take. “We think large-caps would be favoured in the near term. However, given the steady domestic growth expected over the coming years, small-caps and mid-caps could outperform the large-caps over the next three years,” he said at the Annual Equity Outlook for 2023 Conference.

Nirmal Bang Equities prefers large-caps, given the current macro outlook as markets are likely to remain volatile and some correction is on the cards but believes that mid-caps and small-caps will see traction once interest rates begin to ease.

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