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Time to cut exposure in mid & small caps and invest in large and high-end midcaps

Globally, elevated prices & valuations are the key issue for future performance of the equity market.

August 22, 2021 / 08:26 AM IST


On a long-term basis of 10 years, Nifty50 is 33 percent above the long-term average while mid and small caps indices are 20 percent and 58 percent higher, respectively.


In a medium timeframe of five years, Nifty50 is 19 percent above average and Midcap is only 1 percent while Smallcap is 37.5 percent above average.

Generally, this is not the best time to invest aggressively in the equity market, in which smallcaps are extremely overvalued. At the same time, economic forecasts suggest a good time for the real economy. It is expected to rebound strongly in 2022 and 2023, which will provide a calm to the equity market and maintain its premium valuations.


We should also note that India's valuation has been continuously uprating, as a rising emerging economy. Government constant reforms are highly supporting the movement. India's long & medium-term valuation, which was assumed at 15x, has updated to 16x - 18x with rising FDIs, FIIs and domestic investments. The quality of Indian midcaps has been improving constantly developing the products & services in-line with global standards and technology.

Today, such companies are valued above Largecaps due to higher revenue & sustainable growth. The recent emergence of anti-China policy in trade & investments, by developed countries, is bound to help India for future growth. As a result, rising outlook & earnings growth should uphold high valuations in the long-term.

However, in the short-term, the equity market is getting cautious. Globally, elevated prices & valuations are the key issue for future performance of the equity market. A large amount of current & future benefit from the easy money & fiscal improvement is factors in the stock market. Economic growth is expected to get flattish in the future due to rising variant risk, inflation & tapering.

We have been suggesting to cut exposure in Mid & Small caps. And we continue to foresee correction in Mid & Small caps. If this ongoing tide continues in the same euphoric momentum, it will be a challenge to sustain its trend during Q3FY22 & Q4FY22.

In such a euphoric market, the key point to know is what to do in anticipation of a transformation in economy & its transition to a premium valued stock market. The way out is to cut portfolio risk. Cut exposure in small & midcaps. Increase in large & rising mid-caps, as they are expected to do better than the market. Put money in sectors where the government is undertaking policy reforms.

Invest in companies which have the skills, products, and platforms to capitalize from high domestic & global demand and perform value buying. The market is turning more cautious in the short to medium-term, investing in defensive sectors like IT, FMCG, Pharma and Telecom. And one can invest outside equity through MF debt schemes, high quality corporate and government bonds of short durations. Investment on Gold and Sovereign Gold Bonds is also suggested with a maximum mix of 10 percent, given the rising inflation & bond yield risk.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Vinod Nair is the Head of Research at Geojit Financial Services.
first published: Aug 22, 2021 08:26 am

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