The domestic market is reeling under pressure as investors are avoiding equities amid soaring inflation, elevated geopolitical risks and rising bond yield.
Sensex fell more than a percent in intraday trade on April 12 while the BSE Midcap and Smallcap indices fell more than 2 percent each. Clearly, the selloff has extended into the broader markets also which were outperforming the benchmarks so far.
For the last few sessions, mid and smallcaps had been outperforming the benchmark Sensex and many investors began to wonder why largecaps were suffering more than the mid and smallcaps.
The main reason behind this was the FPI selling while the inflow of domestic investors was not able to offset the outflow of foreign funds from largecaps.
"Largecaps are falling because foreign institutional investors (FIIs) are sellers and buying by domestic institutional investors (DIIs) is not substantially more than FII selling. The inflow of new investors continues and these new investors are focusing largely on small and mid (SMC) caps. Hence, SMC stocks are outperforming. This scenario is likely to continue through Q1FY23 since Fed would tighten the rates and also reduce its balance sheet size. This would weaken the rupee and hence FIIs are likely to remain sellers or stay on the sidelines for the whole of Q1FY23," said G Chokkalingam, Founder & MD of Equinomics Research & Advisory.
Deepak Jasani, Head of Retail Research, HDFC Securities also has a similar view.
"Largecaps have suffered lately mainly because of continuous FPI selling over the past 6 months. FPIs portfolio mainly consists of largecaps and these stocks feel selling pressure whenever there is FPI selling. The mid and smallcaps continue to do better than the largecaps due to higher local holdings (including retail and HNI), limited float and better financial performance," he said.
However, now the selloff seems to have engulfed the mid and smallcaps also and investors look nervous owing to the prospects of aggressive rate hikes due to lingering inflation.
Should you change the strategy?
One of the basic rules of successful investing is having a diversified portfolio. At present, it is better if one's equity portfolio consists of large, mid and smallcap stocks.
"One need not change the strategy just based on the near term performance. In any portfolio one needs to maintain a mix of largecaps, midcaps and smallcaps depending on the risk appetite and return expectations. In case the bearish sentiments continue, then even the mid and smallcaps could start facing selling pressure. On the other hand, if the FPI selling halts or reverses, we could see higher buying interest in largecaps going forward," said Jasani.
Analysts are pointing out that the market will continue to be choppy in the near- term, torn between positive and negative news.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services highlighted that the near-term headwind continues to be the rising US bond yields. US 10-year bond yields have crossed 2.7 percent, raising the anticipation of a rate hike of 50 bps in the next FED meeting.
The tech-heavy NASDAQ has turned distinctly weak and this has led to some profit booking in Indian IT stocks too. But IT is likely to do well as TCS results indicate robust deal wins and order flows, said Vijayakumar.
"TCS results are in line and marginally above expectations. This can support IT stocks even if there is some profit booking. Results of leading financials will be better. This along with good expected performance from telecom, oil and gas, metals, pharma and chemicals will lead to buying on dips imparting resilience to markets," said Vijayakumar.
As per Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities, sector rotation and style rotation are the keys to making money going forwards.
"As we have seen historically, value themes tend to do better in rising inflation and interest rate scenarios. We could see a good allocation in value-oriented sectors in the next 1-2 years. The Q4 earnings season and the global news flows will drive the market fundamentals in the near term," said Chadawar.
"In Q4FY22, we expect commodities and services which include banks, metals, oil & gas, and IT to display robust earnings growth on a year-on-year (YoY) basis. Keeping the heightened commodity cost pressure and the supply side constraints in view, it is likely to be a challenging quarter for commodity consumers like automobiles, FMCG, cement, and specialty chemical sectors,” he said
Investors may have different investment strategies based on their risk appetite and financial goals but in case of confusion, the evergreen strategy is to stick to quality stocks across segments.
"Currently the premium between midcaps and largecap has increased significantly and currently trading at upper end of the last five years' average, so we suggest investors stick to the diversification across largecap, midcap and smallcap stocks," said Yash Gupta- Equity Research Analyst, Angel One.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.