As per the most recent trend, the outperformance phase is now restarting in the 10 companies with largest market capitalization, noted the latest DSP Netra report. It said only a source of relative attractiveness can be found in the large cap universe of stocks because on absolute basis they aren’t cheap.
According to the report, the share of top 10 stocks relative to the total market capitalization is hovering near all-time lows. “Considering the large excess returns delivered by the non-largecap universe and the narrative that ‘domestic flows’ would not allow non-large cap universe to ‘fall’, it is not easy to use this rare occurrence to advantage,” it said. Which is why, the fund house sees the largecap universe becoming ‘a hiding place from the virus of volatility which has infected the market in the last quarter of 2024’.
Valuation Extremes
Historically, periods of inflection in underperformance of top 10 names versus the rest of the market have coincided with a general ‘Riskoff’ environment, it said and added that the large addition to India’s overall equity market capitalization from new listings have made the top 10 cohort even more attractive. This is because more than two-third of new issues have listed at multiples which are upwards of 50x price to trailing earnings and this means that the new market cap addition has a low profitability base versus the top 10 stocks, it said.
The report said that during periods of market optimism and strong performance, substantial capital becomes readily available for both high-quality and speculative ventures and this environment often drives a surge in IPO activity, fueled by heightened investor confidence and an increased appetite for risk.
It said: “Historically, such fund-raising booms have signaled the late stages of market cycles. When capital flows abundantly, investors often overlook company fundamentals, leading to eventual market corrections as the exuberance fades. In many of these cycles, companies issue more Offers for Sale (OFS) than fresh equity, indicating that promoters are cashing out rather than reinvesting in the business. Currently, we have already surpassed 71% of the previous year fund raising FYTD (which was an all time high).”
Mid/Small-Cap Signal
The report highlighted that SMIDs tend to sharply outperform large caps in broader market rallies and give back a large portfolio in the subsequent weak phases but, in the last 5 odd years, SMIDs have done extremely well for the most part. While the extent of outperformance softened over the last few months, there was no meaningful reversal. Over the last few days, the trend has shifted, it said that the trend has shifted Nifty MidSmallCap 400 / Nifty 100 has recently fallen below its 200 Day Moving Average. “As a result, the Flexicap SMID vs Large Cap signal now points to the relative attractiveness of the large caps,” it said.
From October till December so far, the Nifty top 10 equal weight index has risen 9%, Nifty 50 nearly 7%, and the Nifty 100 index has gained around 5%.