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Large-caps or mid-caps? Stock-picking in times of trouble
Publish Date: October 09, 2018
This is the third article of a four part series that focuses on how the markets will fare in the coming months.
The Indian markets are getting a good shake-up right now.
Continued rupee depreciation, higher crude prices, credit market defaults, corresponding stress in non-banking financial institutions and higher yields have all contributed to the current volatility in the market.
In such times of tumult, traders are often in the dark about their future strategy, how to go ahead investing in stocks.
Related read: What is troubling India’s financial markets
Which stocks to buy, is it the right time to buy, whether to go for large-cap stocks or mid-cap stocks — are some of the common questions people usually have.
Related read: What are large-cap funds and mid-cap funds
In this article, we’ll run the rule over both large-caps and mid-caps and help answer some of these questions.
March of the mid-caps
The National Stock Exchange’s mid-cap index had a great run between Jaguar 2014 and December 2017. The mid-cap stocks collectively outperformed the Nifty 50 — it is a collection of the more popular stocks ranging across 12 different sectors of the economy — by almost 58% in that period.
To give you a perspective, the mid-caps surged by a whopping 166% during that period.
The tide turned in 2018 though. This year, mid-cap stocks fell behind the Nifty 50 by 23%.
In the larger context, the mid-cap stocks still show a larger gain in the last four years as compared to Nifty 50. But the truth is that the mid-cap surge has finally slowed down.
Tough going
The current volatility in the market has made it worse for mid-cap stocks.
While Nifty-50 has lost 12% in the recent carnage, large swathes of the mid-cap stocks are scraping the barrel.
The steep correction in the last few weeks has meant that many of these stocks are trading close to their 52-week lows. Media reports suggest that mid-cap stocks have plummeted by more than 20%.
The deep cuts endured by the mid-caps are fairly common in times of trouble. They tend to over-react to market sentiments. The reverse is true as well. To put it simply, when the markets do well, the mid-cap stocks generally do very well and usually outperform the large-cap funds, but during difficult times they are more prone to suffering reverses.
The mid-cap valuations have taken a beating as well. But value hunters may insist that this is the time when one should invest in mid-cap stocks.
Related read: Explaining the meaning of valuation of stocks
However…
These are uncertain times.
A further decline in Nifty 50 — which takes into account several large-cap stocks — can be harmful for mid-cap stocks. That’s because Nifty takes into account several large-cap stocks. Stocks of well-recognized companies usually deal with strife better. For example, you would expect companies like Maruti Suzuki, Reliance Industries and HDFC Bank to deal with the volatility better, wouldn’t you?
But mid-cap stocks may not have the heft and the bandwidth to deal with such systemic shocks. In short, they are far more vulnerable to market volatility.
Given this backdrop, it would be risky to look for value in mid-cap stocks. The markets are expected to remain on the tenterhooks amid geopolitical, trade and political uncertainties.
You can read the previous two articles of the series — part 1 and part 2 — to understand why there is no end in sight to any of the problems at the moment.
What should the strategy be?
All in all, it would be risky to put all your money in mid-cap stocks.
If you are looking from a long-term perspective (two to three years), it would be ideal to have a mix of large-cap stocks and carefully-selected mid-cap stocks. Ensure that a larger portion of your investment is on the safer large-cap stocks.
Avoid investing in one go. Spread your buys across four to five months. In such case, taking the SIP route to invest in stocks would be ideal. (Click here to know more about Autoinvest, our equity SIP facility)
Related read: Benefits of SIP investment
Stock tips: In large-caps, stick to wealth-generating sectors like pharmaceutical, private sector banks and automobiles. While picking mid-cap stocks, hunt for beaten-down companies with healthy growth prospect in future. Target companies that have a strong management and report robust earnings.
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