Lok Sabha Elections 2024 trading strategy: Largecaps or midcaps – what should you bet on?

While the outperformance gap between midcaps and largecaps has narrowed in May, midcaps continue to lead. The recent rally, driven by a surge in index heavyweights ahead of the election results, has led experts to believe that largecaps will outperform the broader markets following Modi's anticipated win.

In May, the Nifty50 index was exceptionally volatile, now up 0.6 percent MTD while the Nifty Midcap100 index has jumped 2.6 percent. However, in the previous month, the Nifty rose 1.2 percent as against a 2.8 percent rally in the mid-cap index.

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Overall for 2024 YTD, the mid-cap index has advanced 13 percent as against a 4.6 percent rise in Nifty. Meanwhile, in the last 12 months as well, the trend has been the same. The mid-cap index has rallied 55.5 percent versus a 22.3 percent gain in the benchmark.

This demonstrates their ability to generate substantial value for investors, highlighting the attractiveness of these stocks for those willing to embrace volatility and seek significant growth opportunities in their portfolios.

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However, experts are concerned over the froth formation in the Indian equity market, especially in the broader markets due to their massive run-up in the last few years.

In the last 3 years, the Nifty Midcap index has given multibagger returns, surging 103 percent as compared to a 47.3 percent gain in Nifty.

But will there be a trend reversal soon? With the election results just a few days away and the expectations of the incumbent government continuing in office for the third straight term with Narendra Modi as their leader, will largecaps get a boost? While largecaps appear slightly overvalued, they are not as overvalued as midcaps. Here's what experts have to say:

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Nishit Master, Portfolio Manager, Axis Securities PMS

Looking at current valuations at the index level, we believe that index heavyweights would be in a better position for the remaining part of the year, especially if foreign portfolio investors (FPIs) become interested in the Indian markets again after the elections due to the clarity of policy certainty.

Trivesh D, COO, Tradejini

A BJP win would probably boost investor confidence, which would be especially advantageous for large-cap firms. Energy, healthcare, and infrastructure are the sectors that stand to gain from it. Since Modi's flagship economic initiative has been ‘Make in India’, the manufacturing sector is also anticipated to perform better in the post-election rally than the market.

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Diwakar Rana, Senior Research Analyst at Prudent Equity,

The markets hate uncertainty and as soon as the volatility increases, the smallcaps and midcaps go out of fancy, investors run for capital protection rather than appreciation. The current volatility has led to some buying in the blue-chip companies. For the last 12 years, we have always been small and mid-cap investors and we believe that big wealth is created in the small and mid-cap space and this shall continue in the coming future.

Ravi Singh, SVP - Retail Research, Religare Broking

We believe that largecaps will outperform but as an investor, one should allocate 40% of his portfolio in large-cap stocks for stability and 30 % each in small and midcaps for alpha generation over a longer time horizon.

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In conclusion, while midcaps have continued to outperform largecaps, the upcoming election results and the anticipated continuation of the incumbent government under Narendra Modi could shift the momentum in favor of largecaps. Despite concerns about overvaluation, largecaps are seen as better positioned to attract foreign portfolio investors and benefit from policy certainty post-elections.

However, the substantial returns from midcaps and smallcaps over the past few years demonstrate their potential to generate significant value, especially for investors willing to embrace volatility. Ultimately, a balanced approach, considering both largecaps for stability and midcaps for growth, might be prudent for navigating the post-election market landscape.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.