Large caps -The road less travelled!

Hyderabad: “Investors’ behavioral biases tend to exacerbate recent market trends which leads to momentum. Only a few investors can gradually adjust their beliefs to the new information or realities. Psychological reasons to do so lie in the risk of getting whipsawed and short-term underperformance that can persist if the madness of crowds continues. Indian markets witnessed a robust rally in the broader markets in the last couple of years reflected in the performance of mid-small cap indices. On the other hand, the boring large caps that hold the ship steady in turmoil are still resting at the harbor with moderate returns” said Sumit Agrawal, Senior Vice President, Bandhan AMC.

“The sheer gap in performance between the broader market and large caps has led to a wide divergence in the valuation premiums. Midcaps today are trading at close-to-life high premiums to the large caps Similar is the case with the small-cap index. In addition, compared to their own history the Nifty is trading at about 16 higher than the long-term average on a 12-month forward P/E basis. However, the midcap is trading at roughly 53 premium and small caps at about 39 premium. In the mutual fund space, we have witnessed strong inflows, most directed towards mid and small space. Large caps have hardly seen any inflows as the trailing return differential though healthy is still lower than what the broader market has been delivering in recent times” explained Agrawal.

“A large part of the large-cap segment has been under pressure due to some macro-led drivers which have led to a bit of underperformance in the past couple of years. The financial sector dominated by banking has been way softer than its usual self, led by concerns about lower margins as interest rates went up in the economy. Similarly, the Technology sector, which performed exceptionally well during the Covid years, bore the brunt of higher rates as the growth premium began to collapse due to rising global rates and concerns about a global recession. Consumer staples also have been weak led by generally high rates and inflationary concerns Pharma, a darling during the Covid crisis, witnessed a natural cooling off” Agrawal added.

“In essence, all these sectors, which together constitute a little more than half of the large-cap segment of the market, as represented in Nifty hurt its stock performance. Interestingly, most of these sectors are likely nearing the end of pain points and may recover soon. One may argue about the timing of the first rate cut, but the direction is clear today with rates heading lower over the next one year. This will have a positive impact on the net interest margins of the financial sector. Lower rates and continued political stability in the country, along with an increased focus on the rural economy will have a positive impact on the credit cycle as well as act as a support for the consumption sector. Globally, lower rates bode well for growth proxy sectors like Technology,” said Agrawal.

“In this context, the large cap segment, which has a much bigger representation of these sectors, is poised at a turning point Valuations, as discussed earlier remain favorable. Investor positioning also remains quite comfortable as large inflows have ignored this space for a while, both by domestic as well as foreign institutional investors. The good old boring large caps look promising from a relative investment point of view. It’s always difficult to go against the momentum in the near term. However, sometimes, some risks are worth taking, or in other words, there are always better risks to take” concluded Agrawal.