Large cap stocks better bet in current scenario

Value of all BSE-listed hit a record high of around $1.92 trillion yesterday, slightly higher than $1.91 trillion seen in January 2008. However, in rupee terms, it has zoomed 113% to Rs 123.50 lakh crore yesterday as compared to mere Rs 58 lakh crore in January 2008. This divergence is due to about 64% fall in the exchange rate of rupee against the US dollar from Rs 39.37 in January 2008 to Rs.64.52 a dollar now.

While the broad indices like the Sensex and Nifty have moved up 21%, the small and mid cap indices have gone up 38% and 35% respectively on yoy basis. On broader level, the Indian equity market has done much better than most of the emerging markets and it is on par with the some of the European major equity indices, which have given the best returns of as high as 27% on yoy basis.

However, in the short-term, the pressures on the retail investors for the supply of financial resources are building up in a big way. Already there has been huge demand pull for the money from the retail investors - fund raising (around Rs.8,700 crore) through the qualified institutional placement (QIP) route hit over two-year high in March. During the whole of FY17 total 22 companies raised Rs 13,671 crore through QIP route. Fund-raising (over Rs.29,000 crore) through initial public offerings nearly doubled in 2017, the best showing in six years;

Going forward a lot more IPOs and QIPs have been lined up. It is not only the private entrepreneurs, even the government is looking into raise Rs 56,500 crore through minority stake sale and strategic sale in PSUs this fiscal. More importantly the government is exploring the possibility of listing several PSUs (like HAL) for the first time on the markets through public issues. Sucking out such large resources through various avenues from the market would obviously lead to a lot of profit booking by the retail investors in small and mid cap space.

Moreover, the valuation comfort doesn't exist in many small and mid cap stocks. Mutual fund managers' investment in equities also declined by 27% to over Rs 51,000 crore in FY17, lower than Rs 70,130 crore invested in FY2016 while that in debt schemes rose over six times to more than Rs 1.76 lakh crore.

Of course, the saving grace is that the FIIs started investing quite aggressively in the Indian equities, however, they are likely to accumulate mostly the large and large mid cap stocks. Hence, this is the time to be cautious on the mid cap space and reiterate conviction in the large cap stocks.