Can Mid-caps outperform the large caps?

Your weekly dose on macros & stocks

First up, why this topic today? Here below is an article from Financial Express of 1st December 2022 (this Thursday) which pretty much explains what the issue is:-

The Nifty-50 today is touching new all-time highs almost daily when major global indexes are still down between 15% to 30% (for example Nasdaq composite which touched $16,200, is still hovering around $11,000 levels). Moreover, the month of November, which could have witnessed continued outflows from FPIs/FIIs, they are actually back with a bang! FPIs/FIIs actually bought $4.4 billion where they were selling $900 million in the previous 2 months.

Now, it’s a well-discovered fact that, when FIIs are back, they start buying the index directly or their favorite blue chip large stocks because they get liquidity there (a lot of overlap there as many stocks are the same only). Keeping a track of foreign portfolio allocations and being able to predict where they are headed will hold the key.

So here’s another graph to show how outperformace has played in favor of large caps in the last 45 days:

The blue line in the above chart is of Nifty Midcap & the yellow represents the Nifty 50. Over the last 45 days(barring this Friday) where Nifty 50 went up ~8.5% & the Nifty Midcap is up 6% (outperformace of ~2.5% in such a small span of time, majorly coming in the last 20 days)

(On the face of it, these are not bad returns at all)

Retail portfolios tend to be multi-cap by nature as they compose of a variety of stocks & even penny shares, leading them to underperform if the mid & small-caps don’t perform at par. To some extent, the rally in HDFC twins, Reliance & I.T. pulling the market higher is another cause for Nifty to outperform.

What should Investors do?

The trend of outperformance is not new & Indian markets have always gone through short-term/medium-term phases of such trends. Here’s a strong trend of outperformace of Nifty 50 over mid-caps which was witnessed throughout 2019:

Nifty-50: +15% | Nifty mid-cap: ~0% (No returns)

Catching a trend is very important. If you caught the strong trend of medium-term outperformance even in the middle of the year, you would have surely protected your capital & outperformed.

In 2019, about 9-10 big Nifty 50 stocks contributed to over 90%+ market cap gains that year; growth was slowing down back then in India, as well as, throughout the world (remember the rate cut by the US fed in 2019 to support growth?). With lesser growth opportunities, markets tend to consolidate in favor of the stronger players making their shares rally. Even the rural economy of India was also not doing as great the way it’s doing today(GDP growth for the Agriculture sector came in at 4.2% in Q2 FY23 recently) & vehicle sales of both 2-wheelers & 4-wheelers were going down (a trend that started in 2018 itself, indicating weakness in the economy). Even credit growth in 2019 was in single digits, which today is ~18%!

India today is growing at a much faster rate & a broad-based rise in income levels. It's also projected to grow well in 2023. Rural consumption too is now expected to do well(as indicated by many FMCG companies in their quarterly con-calls), after remaining soft for the last few quarters.

So here’s our take on current situations. We believe that the recent outperformace is not a start of a new trend but just a short-term phenomenon. Stock picking amongst midcaps & small-caps will hold the key in the medium term & shall support your portfolio to outperform. Our outlook on new-age/ tech companies who came out with their IPOs in 2020 to 2022 is positive. The recent inclusion of PB Fintech & Nazara tech in our client portfolios is a testimony of our view. Checkout of detailed research on Nazara here- ‘Link’

We hope you enjoyed the post. Why not recommend it to someone who would enjoy reading it? Ending with some disclosures:

Personal & client investment/interest in the shares exist; this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome