The divergence between large-cap stocks and mid- and small-cap shares in America, and that in India reflects “combination of hype and reality regarding certain developments in the two markets,” according to a report by Kotak Institutional Equities. While in India, large-caps are laggards in the current market rally, which is led by small- and mid-caps; in the US, it’s the mega-cap stocks dominating the markets. However, the upside for both markets might be capped as valuations in Indian equities are becoming stretched, and the US economy slows down.
Mid- and small-cap indices outperformed Nifty 50 index over the past four months
Indian markets: Valuation acting as headwinds
Over the past six months, several large-cap shares have seemingly underperformed the broader markets, dragging the markets, despite the strong performance of small- and mid-cap companies. Few large-cap companies have seen a revival, signalling that the markets are either searching for value or seeking safety in blue-chip shares. Kotak said that they were unsure how to interpret the current movement in Indian equities. The norm dictates that large-cap stocks lead mid- and small-cap stocks in rallies, but the bullish sentiment is being driven by the rally in smaller names. This reflects the positive momentum coming from DIIs and retail investors, as FIIs are unlikely to buy into smaller companies. “Valuations are expensive in India, a natural headwind for the market,” added the report.
America: Mega-caps lead the rally
Compared to the muted performance of large-, mid- and small-cap stocks, mega-cap stocks have outperformed, driving the overall market performance. “The 6-8 technology-oriented mega-cap stocks have performed presumably on expectations of them dominating the emerging AI space. However, we note that the AI landscape has several large players, unlike the segments that the mega-cap companies have dominated for the past 10-15 years,” said Kotak. Various segments such as consumer electronics, cloud, e-commerce, search and social media have only a few dominant players.
AI will see each of these entities pitted against each other, a very different landscape compared with the landscape when these companies and industries first emerged and achieved scale. However, it is unlikely that the AI-driven rally on Wall Street will sustain against the high interest rate backdrop and the eventual slowdown in household consumption, added the report.