Time is ripe to tilt towards large cap stocks

Small and mid cap stocks have done phenomenally well in the last couple of years. Both the BSE Smallcap and BSE Midcap indices have hit record highs this month. Since the 2013 bottom seen in September, the BSE Small cap index has moved up by 108% from 6,551 to over 13,600 now, while the BSE Midcap index is up 140% from 5,600 to over 13,500. In the same period, the BSE Sensex has gone by 80% from its bottom in 2013.

Due to this significant outperformance of indices of both mid and small caps, the overall market is actually at a record high level, going by the market caps of entire BSE-listed stocks. Quite interestingly, when the Sensex hit a record high of over 30,000 in March 2015, the market cap of the entire BSE-listed stocks was at Rs 105.40 lakh crore. Now though the Sensex is still about 3.6% lower than this record high level, the market cap of entire BSE-listed stocks has gone up by 12% to Rs 117.70 lakh crore since then.

Although the performance of corporate earnings was better in the December quarter of 2016, a significant part (about 30%) of profits accrued from "Other Income". Net revenues have also grown in poor single digit for over 2500 companies in this quarter. Moreover, on the macroeconomic front, certain broad indicators are still causing concerns – the banking credit growth remains at record low level of less than 5%. The growth in IIP (Index of Industrial Production) for the cumulative period of April to December in FY17, it is almost stagnant at 0.3% as against 3.5% YoY growth in the corresponding period of FY16. While India's exports look apparently better in terms of positive growth (over 4%) in the recent months, it is still stagnating at lower levels at a monthly run rate of around $23 billion as compared to over $26 billion a couple of years ago. The recent trend in the capital expenditure too is a cause of concern.

In such a scenario, focusing heavily on the small and midcap segments is quite risky – any correction in the overall markets could lead to steep corrections in these segments. Due to poor institutional penetration and liquidity, these stocks normally fall much more than the large cap stocks. Also, it is a little difficult to exit from some of them due liquidity constraints. Hence, time is ripe for the retail investors to shift away from the over or fairly valued mid and small cap stocks and tilt towards the large cap segment.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd