Midcaps and smallcap stocks have had an excellent run at the bourses so far, with the indices touching lifetime levels of late. Notably, the BSE smallcap index has rallied by more than 47% in the year so far, while the BSE midcap index is up by more than 37% in the same period. In comparison, the Sensex has returned 22% in the year so far. As the markets have seen a rally across market capitalisations, raising concerns of overvaluation, Mahesh Patil of Aditya Birla Birla Sun Life MF advised investors to hold on to winner stocks. He explained that investors may be better off by holding on to these stocks even beyond their target price. “There is always a temptation to really book profits in stocks once they reach a target price but as long as the compounding continues and as long as the companies continue to deliver, the compounding continues over a longer term as that will really create immense amount of value.” Many top fund managers and market experts alike have voiced a preference to invest in largecap stocks going forward. We explore two key reasons why managers are telling investors to move large caps.
Midcap and smallcap stocks overheated
Top market voices point out that the midcap and smallcap stocks has recorded stellar gains in the year, and the space appears to be overheated now. In an interview to CNBC TV18, Harsha Upadhyaya CIO-Equity, Kotak Mutual Fund said last week, “On valuation front, midcap is relatively higher compared to largecaps. As asset sizes increase, the challenge increases to find value in the space. However, funds which are mandated to invest only in midcaps will try to find opportunities within the space. Multicap portfolios where we can move across market capitalisations, our tilt is towards largecap. On similar lines, Vetri Subramaniam of UTI AMC told ET Now in September this year, “If I were an investor making allocations and just looking at where valuations are, I would have to believe that the better opportunity today lies in largecaps as compared to midcaps.”
Earnings recovery to benefit large caps
Analysts observe that the earnings in the September quarter have been better than expected. “The earnings have come as breath of fresh air and one can look forward to better earnings due to base effect and disruptions behind us.” Gautam Duggad, Head of Research-Institutional Equities at Motial Oswal, pointed out that in the firm’s universe, upgrade to downgrade ratio has improved from 0.46 to 0.84 and the surprise to miss ratio is at a sixteen quarter high at 1.3. “Out of the 17 sectors that we track, almost 14 have reported EBITDA which is either in-line or ahead of estimates,” he told CNBC TV18 last month. Experts point out that this pick-up in earnings will benefit largecaps. “I believe when the earnings cycle improves, largecaps have a much bigger way to go. One of the reasons midcaps have done well is while local investors have been exuberant, foreign investors have hardly been exuberant in 2017. I still believe that largecaps will provide value to the largecap investors,” S Naren of ICICI Prudential MF told CNBC TV18.