Mid and small-cap indices hit new highs in 2024; is it time to move to largecaps? Here’s what top experts suggest

Midcaps and smallcaps made a strong comeback in the previous year, outperforming largecaps by a wide margin. While the Nifty Midcap and Nifty Smallcap indices surged 40-50 percent in 2023, the benchmark Nifty rose over 19 percent.

Overall, the Indian stock market remained resilient in the year 2023 amid weak global macros, rising interest rates, and geopolitical uncertainties.

Read here: Axis Securities lists 8 mid and small-cap stock picks for January 2024

Even in 2024, the benchmarks as well as the broader markets have hit new peaks in the first week of the year amid positive global cues, hopes of a rate cut, continued foreign investor inflows, and ahead of the Q3 earnings season.

The Nifty Midcap 100 hit its record high of 47,647.90 on January 5, meanwhile, the Nifty Smallcap 100 hit a new high of 15,523.80 in intra-day deals today, January 8, 2024. Benchmark Nifty, on the other hand, hit its all-time high of 21,834.35 on January 1, 2024.

The midcap index has rallied 51 percent in the last 1 year and 2 percent in January so far. The Nifty Smallcap 100 index has jumped 60 percent in the last 1 year and 1.5 percent in January till date. In comparison, the Nifty has added 21.5 percent in the last 1 year and is down half a percent in January till date.

Read here: Five midcap stocks that could turn into largecaps in 2024

Going ahead, experts believe that the rally in midcaps and smallcaps in 2024 is not likely to be as strong as the one in 2023 due to high valuations but the long-term outlook of the broader markets remains robust. Furthermore, the analysts have started to prefer largecaps over midcaps and smallcaps in 2024 after last year's surge. 

Let's see what various experts predict for the broader markets this year.

Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities

The Sensex to smallcap ratio is currently placed at a 16-year low. This means that Sensex or large-cap stocks are underperforming smallcaps drastically. The year 2024 will be a year of comeback for largecaps. Mean reversion will be the name of the game in 2024. Largecaps as a group are trading below their historical valuations. These category stocks will bounce back. On the other hand, small and mid-cap stocks that are trading way above their historical valuation will be pushed down to their mean going ahead.

Read here:  'Froth overdone in midcaps, smallcaps, switch to largecaps'

Axis Securities

With the strong catch-up of midcaps and smallcaps in the last couple of months, we believe the margin of safety at current levels has reduced as compared to that available in largecaps in terms of valuations. Keeping this in view, the broader market may see some time correction in certain pockets in the near term and flows will likely shift to largecaps. However, the long-term story of the broader market continues to remain attractive.

Anish Tawakley, Deputy CIO - Equity, ICICI Prudential AMC

Market valuation needs to be seen in the context of the earnings outlook.

If we look purely at multiples (P/E or P/B) we find that in the large-cap space, the multiples are slightly expensive relative to history, but the earnings outlook is better than history.

So our view is that, if the earnings come through and you stay invested for three years, then returns - driven by earnings growth - can be reasonable returns even if the multiples compress somewhat. In the small-cap and mid-cap space, we do think the froth is overdone and would recommend booking profits and switching to largecaps.

Read here: 'Infra to remain in focus in Budget 2024; overweight on midcaps, smallcaps'

Kotak Institutional Equities

There is very little value in most parts of the market after the recent run-up in mega-cap stocks, the last bastion of value in the market until recently. Remain quite cautious on the mid-cap and small-cap stocks for the past 3-4 months and positive on the large and mega-cap names. The Indian market is richly valued both on a top-down and bottom-up basis.

Nuvama Wealth Management

Valuations now look stretched from all perspectives.

Since Mar-23 specifically, mid-cap and small-cap indices are up 47 percent and 61 percent, respectively, outperforming Nifty 50 by 27 percent and 41 percent, respectively. Especially, the small-cap valuations (one-year forward PE is more than 20 times) look quite stretched (compared to the long-term average of fewer than 15 times and now at a premium to Nifty valuation versus a long-term average discount of 15 percent).

Read here: Indian stock market has upside potential despite fair valuations: Motilal Oswal

Given the high mortality rates that smallcaps see (only about 10 percent of the smallcaps become midcaps over a five-ten year period, the rest remain smallcaps or become micro-caps), we believe that smallcaps are in a vulnerable zone now.

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 decision.