Mumbai: With the benchmark indices and broader market rallying near record high levels, analysts say large caps are a better bet compared to mid- and small cap stocks, which have rallied much more than their bigger rivals.
While BSE Sensex has risen 13.38% year to date, BSE mid-cap and small-cap indices have climbed 24.5% and 28.9% respectively.
“The market sentiment is upbeat on the back of structural changes in the country. Investors are keenly awaiting GST (Goods and Services Tax Act) implementation now, and the mood is optimistic,” said Deven Choksey, group managing director at KR Choksey Investment Managers Pvt. Ltd.
“In such a bullish scenario, when fortunes are changing fast for businesses, large cap stocks make for a better choice, as they are capable of absorbing higher flows given their higher market value, and relatively reasonable valuations compared to largely expensive mid-cap and small cap space,” added Choksey.
BSE Sensex trades at 17.74 times one-year forward earnings, at a discount to the latter two, which trade at 19.47 times and 18.93 times 1-year forward earnings respectively.
“Large caps at this point of time offer better risk reward profile compared to mid caps,” said Harsha Upadhyaya, chief investment officer (CIO)-equity at Kotak Mahindra Asset Management Co. Ltd.
Of the 85 stocks in the BSE mid-cap stocks, 77 have returned gains year to date, while 645 of 772 BSE small cap companies have logged gains so far this year.
On the other hand, 22 of 30 Sensex stocks have registered gains in the same period.
Seventeen mid-cap and 98 small-cap stocks recorded new highs this month, while four Sensex stocks logged an all-time high in May.
The top performing mid-cap stocks for the year to date are Sun TV Network Ltd, Bank of India and Indiabulls Housing Finance Ltd. which have rallied 82%, 66.7% and 65.1%, respectively.
In the same period, the best performing small cap stocks were Indiabulls Ventures Ltd, Venky’s India Ltd, and National Fertilizers Ltd, which have jumped 607%, 187% and 147%, respectively. The best-performing Sensex stocks so far in 2017 are Adani Ports & Special Economic Zone Ltd, Larsen & Toubro Ltd, and HDFC Bank Ltd, which have rallied 33.2%, 28.9% and 28.6%, respectively.
Large-cap stocks are usually closely analysed as compared to mid-cap and small-cap stocks. Also, as is the case in a bull market, the retail investors are typically late entrants in the cycle, and are lured by euphoria. These are typically less-informed investors, who fall prey to market frenzy, usually beyond the large-cap space.
Also, among mutual funds schemes focused on mid- and small cap stocks, a few faced the problem of lack of decent options to choose from for deploying new money.
In February, DSP BlackRock Micro Cap Fund stopped accepting fresh inflows, as there was a lack of enough good opportunities in the space at reasonable valuations, according to its fund manager Vineet Sambre. He added that the fund size had also grown considerably. Currently, the size of the fund has ballooned to more than Rs5,500 crore.
“Overall, the market is at the higher end of valuation spectrum. Coming to mid and small caps, because of the phenomenal run in their stock prices in the last 2-3 years, most of these companies have crossed their historical average,” said Sambre, also senior vice-president at DSP Blackrock Investment Managers Pvt. Ltd.
Sambre said the growth from here has to be linked to earnings performance, and the way corporate results are so far, earnings are yet to pick up, while stocks are rallying on hopes of improvement that there will be earnings recovery in two or three quarters. Huge inflows, specifically from domestic investors was also driving the market higher.
“I would have been happier, if small and mid cap traded at slightly lower range. They are currently beyond reasonable valuations, and hence, large cap stocks should be preferred,” said Sambre. Others seem to agree.
“Over a period of time, we expect them to perform equally with large cap. Hence, we see more opportunity in the large cap space. This is not to say that one should sell the holdings in mid-cap space but in case of fresh investments, large cap space should be preferred,” said Ravi Sundar Muthukrishnan, co-head of research, ICICI Securities Ltd.
“In the mid-cap space, one should pick companies with a proven profitability track record, with good management and from the currently upbeat sectors,” added Muthukrishnan.