Will largecaps outshine smallcaps on Dalal Street? Here’s what analysts say

After several months of underperformance since the onset of the raging war in the Middle East, Dalal Street’s large-cap stocks may soon take over the reins as analysts now highlight fair valuations.

The benchmark index Nifty 50, which comprises 50 heavyweight large-cap stocks, has recorded only marginal gains in August so far, and remains nearly 3% down overall since the onset of the US-Iran war in March. The Nifty Smallcap 100 index at the same time has gained around 3% this month, and a whopping 17% since March, bucking the trend.

Latest data released by the Association of Mutual Funds in India (AMFI) reflect that investors continued to show strong interest in relatively riskier small-cap and mid-cap schemes in July. Large-cap funds, meanwhile, witnessed their first monthly outflow in 30 months.


AMFI data showed that small-cap funds received the highest inflow at Rs 7,767 crore in July, marking the highest-ever inflow in the category. Mid-cap funds received an inflow of Rs 6,192 crore in July marking a 2% jump from Rs 6,090 crore in June. On the other hand, large-cap funds saw an outflow of Rs 1,321 crore in July.

Also read | Smallcap, midcap mutual funds see rise in inflows; largecap funds witness first outflow in 30 months

Analysts point out fair valuations

However, analysts are now pointing out the fair valuations in the large-cap space after the consolidation. "The Nifty near 21x forward sits close to fair value, while small-caps still carry roughly a 70% premium over large-caps versus a long-run norm nearer parity," said Vaqarjaved Khan, Senior Fundamental analyst at Angel One. He added that the median small-cap has badly lagged its index, with nearly three-quarters of the Nifty 500 still below record highs.

With little room for multiple expansion, returns will track earnings favouring large caps, according to the analyst. However, he would not write off the broader market as genuine value is surfacing in select small-caps, particularly financials, IT and chemicals.

A resolution on US trade uncertainty could spark a broader recovery, he concluded, advising investors to stay tilted to large-caps, but select spaces in small-cap can add high value alpha.

Indian equities briefly brushed aside concerns over fresh US-Iran hostilities and rising oil prices this month as corporate earnings and sector-specific buying supported sentiment, but markets soon factored in the prolonged closure of the Strait of Hormuz along with chaos and panic created due to the newly introduced Closing Auction Session (CAS).

Also read |Ashish Kacholia, Vijay Kedia beat Nifty in Q1, portfolios swell up to 40%

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)