Sensex climbs 6,000 points in about 7 months; smart money moves towards large-caps

“Overall, market sentiments remain bullish for the long term. Hence, we are expecting more upside in the index towards 56,500/57,000,” he said.

A major part of the rally was fuelled by large-cap stocks as the broader market saw profit-taking in the past month or so, but since January 21, the broader market indexes have outperformed the Sensex by a huge margin.

While the Sensex gained 12 percent since January 21, the BSE SmallCap Index surged 40 percent and the BSE MidCap index advanced 22 percent.

Experts said smart money could now move towards large-caps, which have underperformed.

“The current rally is clearly led by large-cap companies and especially those that have underperformed the broader market in the past 7-8 months. As per the data of 52-week highs of the BSE 500, at every peak we can clearly make out that the current rally is not broad-based and is lagging the support of mid-size companies,” said Shrikant Chouhan, executive vice president, equity technical research, at Kotak Securities. “Also, we need to be cautious while adding fresh long positions at supports. In such types of markets, as per my experience, instead of adding stocks at supports, we should look at adding only those stocks that are crossing their previous highs.”

Earlier, during rallies in midcap and small-cap stocks, most shares traded in higher territory and the indexes crossed new milestones. However, there’s been some profit-booking in these segments recently and the rally is getting narrow.

“As markets are moving up continuously, a breather or profit-booking is required. After some consolidation, we should again see a rally, so we would suggest initiating long at lower levels. One thing is sure: selective stocks will move so one has to be choosy and selective for better returns,” said Gupta of Choice Broking.

What should investors do?

Investors with long-term portfolios can look at moving away from small and midcap stocks and increase allocation towards large-caps. Outperformance in the small and midcap space will now be a factor of earnings growth.

Selective sectoral leaders will continue to do well, while the rest could still see some profit-taking. Many institutional investors rushed to small and midcap stock in anticipation of growth and inexpensive valuations.

Small and midcap stocks are now trading at a premium to the Nifty, which suggests there is limited upside room. In P/E terms, the Nifty Midcap 100 is trading at a 3 percent premium to the Nifty, Motilal Oswal said in a report.

After Covid-19, the overall environment can remain sustainably supportive of growth for the next few years. Many midsize and small companies will participate in this journey.

“The returns from here on will be driven by stock selection, irrespective of market capitalisation. Of course, weaker businesses will lag while good firms might consolidate if valuations have run ahead and there will be bouts of category volatility,” said Gaurav Misra, co-head equity, Mirae Asset Investment Managers (India). “From an investor’s perspective, depending on his/her risk considerations, an appropriate blend across categories should be sustained. However, a very large weight in small-cap is not advisable as more businesses in that category are vulnerable in periods of economic and market weakness.”

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.