The midcap index has outperformed largecaps in the last 1 year, however, despite the outperformance, experts prefer largecaps over midcaps in the current market environment.
During the last 12 months, the Nifty Midcap index has risen 10 percent as against a 6 percent rise in the benchmark Nifty. Meanwhile, small caps declined 1 percent during this time. However, during the last five years, midcaps have underperformed the benchmark by 10 percent and small-caps by 44 percent.
In P/E terms as well, the Nifty Midcap 100 currently trades at an 18 percent premium to large-caps at 22.2x.
However, in a report, brokerage house Motilal Oswal (MOSL) said, "We find more value in large-caps than mid-caps given the relative valuation equation."
That said, MOSL reiterated earnings delivery is crucial for markets to hold, in an adverse milieu of the volatile and challenging macro.
Another reason for the underperformance of largecaps as per market experts is the continuous FII outflows. Since FIIs have the majority of their investments in large caps, the recent selling by foreign investors is one of the main reasons for the recent underperformance of largecaps. Besides, usually, largecap see more underperformance than the broader markets in the initial phase of correction, they noted.
Roop Bhootra of Anand Rathi also said that Mid-small caps stocks provide greater outperformance than large caps while large caps provide steady and stable returns.
"I think most part of the downside has been done and good stocks with improving business prospects and low leverage should outperform whether they are large or small caps. One should have exposure in both large and mid-small caps stocks with proper balance according to their risk appetite," Bhootra noted.
Vinay Paharia of Union AMC also pointed out that based on small and midcap companies in our fund house universe, he thinks they are fairly valued based on the current set of expectations for the future. However, this segment of the market can witness significantly higher volatility in business and hence we are tactically underweight small and mid-cap companies in our portfolios, he added.
Sushant Bhansali, CEO at Ambit Asset Management highlighted that the best time to invest in quality companies whether it's the large, mid or small-cap is when market sentiment is negative.
"Quality will last for a long time. Long-term consistency beats short-term volatility. We are witnessing valuations for many companies with strong moats reaching reasonable levels. The earlier you get into a quality company the more time you get to benefit from the power of compounding," Bhansali advised.
He further added that mid and small companies which offer a higher earnings growth trajectory compared to large companies can thereby significantly create more wealth over long periods of time. However, he cautioned that one needs to be cognizant of their risk appetite as the ride is much longer and more volatile than large companies which have the benefit of investor confidence for a long period of time.
A disciplined approach to investing in good quality companies over the next few months can be a good strategy to make the most of the lower investor appetite for mid and small-cap companies during a tough macro environment, he suggested to new investors.
With the latest underperformance of largecap in mind amid the ongoing volatility, MOSL prefers Reliance Industries, Infosys, ICICI Bank, SBI, Bharti Airtel, Titan Company, Ultratech Cement, M&M, Hindalco, Godrej Consumer, and Apollo Hospitals in the largecap space.
Meanwhile, in the midcap and smallcap space, the brokerage house likes Chola. Inv & Fin., Macrotech Developers, Ashok Leyland, L&T Technology, Jubilant Foodworks, APL Apollo Tubes, GR Infraprojects, Angel One, Sapphire Foods, VRL Logistics, and Lemon Tree Hotel.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.