Large cap is the flavour of the volatile season
PremiumA BofA Securities survey has shown that a net 61% of investors now believe large-caps will outperform small-caps
Large-caps are set to be in fashion now, as investors who were once chasing mouth-watering returns offered by relatively risker mid- and small-cap stocks are now expected to flock back to large-caps. This is not surprising, given the geopolitical uncertainty and inflation headwinds.
“In the current scenario, large-caps offer more comfort and higher margin of safety versus broader markets. After the relentless selling by foreign institutional investors (FIIs), large-caps are now available at reasonable valuations compared with mid- and small-cap stocks, which are still trading at expensive multiples despite the poor risk-reward," said Nishit Master, fund manager at Axis Securities Ltd.
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As such, the shift of smart money towards large-caps from mid- and small-caps is understandable.
Large-caps tend to have stronger pricing power and are more efficiently run, helping them weather input cost inflation pressures better.
Small- and mid-caps tend to underperform large-cap stocks when interest rates are on an upward trajectory. Potential rate hikes and the flight to safety by investors imply that more underperformance of mid- and small-caps versus large-caps is likely, according to an analysis by Edelweiss Securities Ltd.
For the first time since 2018, the US Federal Reserve raised interest rates by 0.25 basis point on Wednesday. One basis point is 0.01%. The Fed has indicated six more rate increases in the future. In tougher market periods of 2010-13 or 2018-19, it has been observed that the market gets narrower towards large-caps and structural, as mid-caps, small-caps and cyclicals lag, according to the Edelweiss analysis.
“Large-caps are less leveraged and their ability to raise equity capital better than small- and mid-caps. When globally interest rates are expected to rise, we expect outperformance of large-caps to continue vis-a-vis small- and mid-caps at least in the first half of FY23," Master said.
In this calendar year, the Nifty50 is down by about half a percent. The Nifty Midcap 100 and Nifty Smallcap 100 indices have fallen by nearly 5% and 9%, respectively. In calendar year 2021, Nifty’s Midcap and Smallcap indices rallied 46% and 60%, respectively, outperforming Nifty50’s 24% gain. The reopening of the economy after the second covid wave and increased pace of vaccinations added to the optimism on these stocks. The gush of liquidity pumped in by global central banks last year is also said to have found its way into these stocks, analysts said.
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Large-caps are gaining investors’ attention globally as well. The latest survey published by BofA Securities showed that a net 61% of investors now believe that large-caps will outperform small-caps.
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