Lok Sabha election results 2024: Avoid investing in midcaps, smallcaps, advise experts after massive outperformance

Market experts are now advising steering clear of mid and small-cap stocks despite their previous strong performance under the Modi government and consistent outperformance compared to benchmarks over the past year, as well as over the last 3 and 5 years. This recommendation comes as a shift in market sentiment, reflecting concerns about their potential performance going forward.

The 2024 general election outcome surprised the markets as the BJP's seat count fell below anticipated levels. Market positions were influenced by exit polls, projecting a significant majority for the BJP and NDA. The results reveal that the BJP-led NDA secured 291 seats, with the BJP alone securing 240 seats. Significantly, the BJP's failure to attain a simple majority independently implies increased negotiating power for alliance partners.

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In 2024 year-to-date, while the benchmark Nifty gained 4.6 percent, the Nifty Midcap and Nifty Smallcap indices surged 13 percent and 11 percent, respectively. Over the last year, the mid-cap index rallied 53.5 percent and the small-cap index surged 61 percent, compared to a 22 percent rise in the benchmark Nifty. However, in the last month, while the mid-cap index outperformed the benchmark, the small-cap index trailed. Nifty rose 1.2 percent in the last 1 month, whereas, the mid-cap index advanced 3 percent and the small-cap index added just half a percent.

"In the current market scenario, investors should remain cautious about investing in momentum stocks or small-cap stocks which have remained overheated over the past two years. Any sustained period of sideways or downward movement in momentum stocks can trigger a sell-off in these stocks. Investors, therefore, should consider the risk involved before making such investments," said Vaibhav Porwal, Co-founder, Dezerv.

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However, having said that, he noted that a steep fall in the market without any structural change in the fundamentals must be regarded as an opportunity. “We believe that the investors should capitalise on this opportunity for fresh investments in equity.”

Meanwhile, Bernstein maintains an ‘underweight’ stance on small and mid-cap stocks compared to largecaps. They view the recent market sell-down as somewhat excessive in the short term, leaving space for a slight rebound, with capex-linked stocks likely to lead the way. Similarly, from a market strategy standpoint, JM Financial also continues to favor largecaps over small and midcaps due to valuation comfort.

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Moreover, Axis Securities noted an improvement in return on equity (ROE) for the broader market after a subdued performance over several years. However, despite the recent strong performance of midcaps and smallcaps, it believes that the margin of safety in terms of valuations for these segments has decreased compared to largecaps. Consequently, it anticipates potential time corrections in certain market segments in the near term, with flows likely to shift towards largecaps.

Meanwhile, Trivesh D, COO of Tradejini advised, "Instead of making a distinction between large caps, midcaps, and small caps, I would suggest concentrating on the fundamentals and conducting thorough research. It makes no difference if you invest in a large, mid, or small-cap company—staying bottom-up and seeing long-term potential is important. You should prioritize businesses that are capital efficient and can benefit from favorable market conditions. As long as these criteria are met, your investments are likely to outperform the market."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.