What should be your strategy, buy largecaps or chose from mid & smallcaps?

Indian market created history yet again on November 20 when the Sensex hit a new high of 40,816, while the Nifty had a touch-and-go moment with 12,000, just 120 points shy of its best-ever performance of 12,103.

So, what should be the trading strategy? Is it time to buy the fear in the small and mid-cap space or stay with steady large-cap stocks?

The answer lies in your risk-taking ability. Even though the market valuations look stretched, largecaps could still be in favour. However, value buying could be seen in select mid and small-cap stocks, say experts.

The market is at record highs and valuations have been stretched since the last quarter. The broader markets are still significantly lower from their highs as Small and Midcap indices are still down by about 20 percent from their record highs.

“Valuations of Indian equities are near their long-period averages. The Nifty trades at a 12-month forward P/E of 18.8x, just a 4% premium to its long-period average of 18.0x. The Nifty’s P/B of 2.7x is also near its historical average,” Motilal Oswal said in a report.

“At the current trailing P/E of 23x and forward P/E of 18.8x, we see limited triggers for further re-rating unless accompanied by a material surprise in earnings.”

The rally on D-Street is largely hope based, as things on the ground have not moved much. But, recent measures introduced by the government to support the economy and boost consumption will go a long way.

“The divergence between largecap and small/mid-cap is on account of many of the large-cap companies reporting inline or better than expected results. Corporate tax cuts have positively impacted the earnings and even at the operational front ie on sales and EBITA, numbers did not completely disappoint,” Dinesh Thakkar,  CMD, Tradebulls Securities, told Moneycontrol.

“The September quarter earnings failed to show any significant recovery in midcap/small-cap companies. So largecap will attract investors’ attention and value buying can be seen in midcap/small-cap stocks,” he said.

Data suggests that the Nifty is trading at 12-month-forward RoE of 14.2 percent, which is closer to its long-term average of 14.5 percent. The market-cap-to-GDP ratio is at 75 percent, based on FY20E GDP, is almost at its long-term average of 76 percent.

If we look at the broader market, notably over the past 12 months, midcaps were down 2.2 percent, as against the Nifty’s rise of 14.4 percent in the same period. The Nifty Midcap100 P/E ratio has corrected from 19.8x in Oct’18 to 17.9x currently.

Experts feel that the recent correction in the midcaps, now trading at 5 percent discount to largecaps, will open a window for smart money to move into this space.

“We are advising investors to increase exposure in mid & smallcaps, value stocks, and companies which are highly integrated into domestic cyclical. This is in anticipation of a better economy in the coming years. We are also very positive on the banking sector, asset management, insurance, and green energy,” Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.

Economic growth revival is essential for the markets where valuations are stretched. There has to be more broad-based participation (even amongst the largecaps) for the rally to continue, say experts.

They do not see a runaway rally but selective buying could continue, while benchmark indices are exposed to consolidation in the short-term after the recent run-up.

“Considering the current scenario wherein the Indian markets are hovering near to peak levels and with economic growth slowing down, investors should maintain cautious approach,” Ajit Mishra, Vice President, Research, Religare Broking Ltd, told Moneycontrol.

“It would be prudent to stick with quality names with sound fundamentals, strong corporate governance, and healthy growth prospects. Further, we would recommend investors to buy stocks in a staggered manner,” he said.

Stocks to bet on:

Investors should refrain from taking any aggressive positions from here on, as the market clearly looks stretched and there is a wide divergence between valuations and earnings.

There are many individual stocks that are trading at attractive valuation or having specific event buildups and could be a good long-term play. Any retail investors should buy with a long-term view.

We are positive on BPCL, Container Corp, Axis Bank, Dabur India and HDFC Ltd.

We advise investors to increase exposure in mid & small caps, value stocks, and companies that are highly integrated to domestic cyclical. We like KEC International, HCL Technologies, Federal Bank, Apex Frozen Foods and Mold-Tek Packaging.

We would recommend investors to be selective in stock picking since the market is near an all-time high.

We remain positive on stocks such as Marico, Subros, Voltas, Havells, and M&M, which can be brought at current levels and can add more on dips, which would fetch healthy returns over the long term.

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