Midcaps continue to outperform but will they sustain the momentum? Experts advise on if it’s time to move to largecaps

Mid-cap and small-cap stocks have long been attractive for their high return potential. The Nifty Midcap index has outperformed the benchmark Nifty index for the fourth straight month in July (till date), rising 4.7 percent as against a 3.4 percent gain in Nifty.

In 2024 as well, the mid-cap index has jumped over 30 percent versus a 14 percent rise in Nifty. similarly in the last 1 year, the mid-cap index rallied over 59 percent while the Nifty advanced over 26 percent.

However, experts expects a potential slowdown in these segments going ahead. With valuations reaching potentially unsustainable levels, experts are advising caution and suggesting a possible shift towards large-cap investments.

As the stock market continues to show volatility, investors are questioning whether the mid-cap rally will sustain or if it's time to shift focus towards large-cap stocks. Experts from the financial sector weigh in on the current market dynamics and provide insights for investors.

Here's what they say:

Kunal Ambasta, Co-founder and Chief Investment Officer at Liquide

Kunal Ambasta advises a cautious approach towards mid-cap and small-cap stocks due to their high return expectations and potential for profit-booking. "After such a jolt, we might see some profit-booking and slower growth in these segments for a while," he noted. Ambasta recommends focusing on quality stocks and leaning towards large-cap investments for the long haul. "It's crucial to steer clear of stocks with overstretched valuations, where prices are high relative to their earnings potential," he added.

Deepak Jasani, Head of Retail Research at HDFC Securities

Deepak Jasani echoes the sentiment of cautious optimism, suggesting investors rebalance their holdings towards largecaps and larger midcaps. He highlights the potential for partial profit booking in stocks that have seen sharp rises and currently quote at high valuations. "Investors in small and mid-cap stocks look to earn alpha and compound returns. However, robust economic growth leads to the emergence of niche small players set to increase their growth pace," Jasani stated. He expects a market correction post the Union Budget, which may affect small and mid-cap stocks more than largecaps, but notes that some may recover well based on their business models and valuations.

Jefferies

Jefferies highlights a renewed risk of market corrections, particularly in the mid-cap space. It suggests a tactical portfolio adjustment in favor of consumption plays, especially rural ones, while maintaining the base case that India is in a property and capital spending upcycle. "The greatest risk remains in the mid-cap space, and a cautious approach is advisable," it said.

Vaibhav Porwal, Co-founder of Dezerv

Vaibhav Porwal believes it's time to book profits in mid and smallcaps due to their rich valuations while seeing value in largecaps. "Current valuations at the index level indicate that mid- and small-cap space optimism is likely overextended," Porwal explained. He advises exercising caution, booking profits, and capitalising on the strong rally observed. Investors should reassess their market capitalisation allocation and consider reducing exposure to mid and small-cap stocks based on their risk appetite.

Aamar Deo Singh, Senior Vice President of Research at Angel One

Aamar Deo Singh emphasises that valuations in the small-cap and mid-cap equities are quite expensive, leading to a cautious outlook for the second half of 2024. "The remarkable performance of small-cap and mid-cap equities in the last five years was due to solid economic fundamentals and robust corporate earnings growth. However, with stretched valuations, a more moderate performance and profit-booking are likely," Singh stated. He advises investors to be selective in their investment approach.

The consensus among experts suggests that while mid-cap and small-cap stocks have shown significant returns, their current valuations may be overextended. With potential market corrections on the horizon, a shift towards large-cap stocks might offer a safer investment strategy. By focusing on quality and reasonable valuations, investors can navigate the market complexities and make informed decisions aligned with their financial goals and risk appetite.

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.