Midcaps vs largecaps: Where should you bet as market outlook turns foggy?

The performance of midcaps has been quite resilient so far. If we look at the last six months, Nifty Midcap50 has moved almost in sync with Nifty50. Currently, in spite of broader corrections, midcaps are still trading at a premium to largecaps. As we stand at the cusp of an economically crucial situation, the key question is whether we should fasten our seatbelt and ride the midcaps or opt for a stable ride with largecaps?

Historically, in times of declining economic growth, it is the largecaps that have outperformed. When GDP growth dropped between 2010-2012, Nifty50 rose nearly 13% whereas Nifty Midcap50 declined by 11.9%. Similarly, in rising inflation phases, such as between 2007 to 2010, the former gained 53% while the latter gained 30%. This is also attributable to the fact that in the environment of rising inflation and moderating growth, generally larger companies having dominant market positioning tend to have more pricing power, allowing them to take price hikes without significantly impacting demand. This makes largecaps better placed than midcaps.

Apart from this, largecaps will likely be the major beneficiaries if the FIIs make a strong comeback in Indian equities. Further, with Fed tightening its balance sheet and given the building pressure on global markets, the short term direction seems unclear. In such uncertain times, largecaps due to their lower risk factor turn out to be preferred investment choices.

Therefore, as the road appears foggy, investors should overweight large caps in their portfolios and chose a relatively stable ride.

Event of the week
Mirroring the US treasury yield, India’s benchmark 10-year bond yield surged to its highest level in almost three years and breached the 7% mark. This is mainly attributable to the hawkishness underlying the country’s monetary policy committee measures announced last week. Even though the stance is still accommodative, rising inflation seems to have finally caught RBI’s attention.

While the spiking bond yields can negatively impact existing investors, it makes bonds more attractive as an asset class thus keeping the investors muddled for investment options. As the trajectory of the number and timing of interest rates hikes by RBI become clearer, the 10-year bond yields are likely to rise further from here.

Technical Outlook

ET CONTRIBUTORS

Nifty50 closed the week on a negative note and formed an evening star candlestick pattern on the weekly time frame, which is a bearish sign. After October 2021, the benchmark index has been forming a lower top lower bottom pattern and the overall structure of the market across broader indices also has been shifting to the bearish side. Nifty is now trading just at the immediate support of 17,450 and a sustained move below the same may lead to a retest of 16,900 levels. We suggest traders maintain a mild bearish outlook going into the next week. Immediate resistance is now placed at 17,850 levels.

Expectations of the week
In absence of any significant macroeconomic events, markets will concentrate more on quarterly results as they gain pace. Banking and financial services stocks will be in the spotlight and market participants will closely follow management insights about their outlook on economic activity, loan and deposit growth, asset quality, and collection efficiency. As a slew of IT firms is set to announce their quarterly numbers, this sector will also be in focus.

Stock specific movements will be prominent, and as investors react to earnings misses and beats, they are advised to assess the company’s long-term potential rather than basing the investment decisions solely on quarterly performance.

Nifty50 closed the week at 17,475.65 down by 1.74%.