As market hits record high, should you bet on largecaps or smallcaps?

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Indian equity markets will continue to attract both domestic and global capital, but investors should be cautious about overvalued mid- and small-cap stocks. Safety is in quality large-caps, said VK Vijayakumar of Geojit Financial Services.

Stock market today: India has been at the center of the global political and economic discourse for some time now. As the fastest growing large economy in the world, India is viewed with respect among the comity of nations. According to IMF, India will contribute 15 percent to the global GDP growth this year. At a time when China is decelerating fast, India is looked up on with a lot of hope. The fact that India is a democracy unlike many other countries with autocratic, unstable political systems adds prestige to India’s status. The four Ds of India – Democracy, Demography, Digital leadership, and Domestic consumption-led growth – have the potential to transform India into the third largest economy in the world by 2027-28 and an $8 trillion economy by 2032.

The G20 Delhi Declaration has come as a crowning glory for India. The inclusion of the African Union in G20 and the proposed India-Middle East- Europe Economic Corridor (IMEEC) are diplomatic triumphs for India. India has emerged as the voice and symbol of the Global South and the ascendence of Prime Minister Modi as a tall global statesman are matters of pride for India. From the market perspective, what are the implications of these positive developments?

Indian equity markets will continue to attract a lot of money – both domestic and global. Growing awareness about equity investment and financialisation of savings will attract huge domestic capital flows. FII flows will be erratic: responding to factors like US bond yields, dollar index and the exchange rate. But the long-term trend of FII inflows will be hugely positive because India has the best growth story among emerging markets.

Nifty has crossed the psychological mark of 20,000. At 20,000 Nifty market valuations are high, but not stretched. The high market valuations suggest that most of the good news is already in the price. Since the market is a discounting mechanism most of the short-term positives are already in the price; but the market doesn’t discount the distant future since there can be many short-term challenges that may impact the market trend. Therefore, to benefit from the India Growth Story, investors must continue to invest systematically.

Exuberance in mid-and small-caps

Regarding the short-term trends, the divergence in valuations between the mid- and small-caps and large caps is widening. It is a fact that the small-caps outperform the large-caps in the long run. But pockets of the small-cap space are now over-valued. The mid-cap and small-cap indexes are up by 38 percent and 44 percent, respectively, from the low levels of March this year while the Nifty is up by only 15.2 percent since the March lows. This outperformance is attracting huge mutual fund flows into the mid- and small-cap segments, lifting their valuations beyond fair levels. Investors must be cautious about this exuberance.

Safety is in quality large-caps

At 20,000, Nifty is trading at 18.5 times FY25 estimated earnings. This is higher than the long-term 10-year average of 17.5. The high valuations make India the most expensive large market. At high valuations, the market is vulnerable to corrections. But the corrections will be steeper in the broader market. Now, safety is in quality large-caps.

First published in Mint

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