Market Experts Advise Caution with Mid and Smallcap Stocks
Despite their strong performance in recent years, market experts, renowned for their astute observations, advise investors to be cautious about mid and small-cap stocks. This shift reflects their deep-seated concerns about the future potential of these stocks.
Election Surprises Affect Market Sentiment
The 2024 general election results, a true testament to the unpredictability of politics, surprised the markets. The BJP’s seat count fell below expectations, a stark contrast to the significant majority predicted by exit polls. This outcome, where the BJP-led NDA secured 291 seats, with the BJP alone winning 240 seats, will undoubtedly have a profound impact on market dynamics.
Performance Overview
So far in 2024, the benchmark Nifty has gained 4.6 percent, while the Nifty Midcap and Nifty Smallcap indices have surged 13 percent and 11 percent, respectively. Over the past year, the mid-cap index has rallied 53.5 percent, and the smallcap index has risen 61 percent, compared to a 22 percent rise in the benchmark Nifty. However, the smallcap index has lagged in the last month, adding just half a percent compared to the mid-cap index’s 3 percent gain and the Nifty’s 1.2 percent rise.
Expert Opinions on Investment Strategy
Vaibhav Porwal, Co-founder of Dezerv, advises caution when investing in momentum or smallcap stocks, which have been overheated over the past two years. This means that these stocks have experienced significant price increases, often driven by market speculation or investor sentiment, which may not be supported by the underlying fundamentals of the companies. He warns that any prolonged sideways or downward movement could trigger a sell-off, potentially leading to significant losses for investors. However, he also suggests that a steep market decline without fundamental changes could be an opportunity for fresh equity investments, as it could lead to a correction in stock prices, making them more attractive for long-term investors.
Institutional Perspectives
Bernstein has an ‘underweight’ stance on small and mid-cap stocks, favoring large-cap stocks due to valuation comfort. The recent market sell-off might be excessive, allowing room for a slight rebound, particularly in capex-linked stocks.
Similarly, JM Financial prefers large-cap stocks, citing better valuation comfort. Axis Securities also notes an improvement in return on equity for the broader market but points out that the valuation margin of safety for mid and smallcap stocks has decreased. They anticipate potential corrections in these segments, shifting investment flows towards large caps.
Fundamental Analysis Over Cap Size
Trivesh D, COO of Tradejini, underlines the importance of focusing on the fundamentals rather than the market cap size. His advice is to conduct thorough research and prioritize capital-efficient businesses that can thrive in favorable market conditions. He assures that as long as these criteria are met, investments will likely outperform the market, regardless of the company’s size.
One thought on “Market Experts Advise Caution with Mid and Smallcap Stocks Amid Market Shifts Post-2024 Elections”