Analysts play it safe; prefer safety of large-caps amid multiple headwinds

Analysts suggest that the overall market valuation has become attractive after the recent correction and investors can start buying large-cap stocks from a medium-to-long term perspective.

Rising inflation and the rate hikes by central banks, geopolitical developments, a sudden spike in crude oil prices as Opec+ slashed output, possibility of sub-par monsoon back home as El Nino fears rise are some of the headwinds, market analysts said, could keep the overall market sentiment in check over the next few months.

Against this backdrop, they prefer to ‘play it safe’ for now and are favouring the large-cap stocks over their mid-and small-cap peers.

Large-cap stocks, according to Rahul Arora, chief executive officer for institutional equities at Nirmal Bang, are likely to outperform the mid-and small-cap segments going ahead amid these headwinds, as investors turn risk averse and look for safe-haven investment options.

“Our bias will be towards large-caps. Valuations for the broader markets in pockets are still relatively expensive compared to historical averages, whether one looks at chemicals, consumer discretionary, mid-cap IT to name a few among others. Since we expect calendar year 2023 to be one of risk aversion in the aftermath of the impending effect on the global economy because of the incessant rate tightening by central banks, on a relative basis, large-caps will outperform the midcaps this year,” he said.

In fiscal 2022-23 (FY23), the small-cap segment underperformed the frontline indices. While the S&P BSE Sensex FY23 gained 0.7 per cent, the small-cap index on the BSE lost 4.5 per cent, data shows. The S&P BSE Midcap and the BSE 500 indexes, too, slipped 0.2 per cent and 2.3 per cent, respectively during this period.

At a macro level, Neeraj Chadawar, head of quantitative equity strategy at Axis Securities suggests that the upcoming earnings season and the companies’ commentary, among other global and domestic cues, will impact the market's trajectory.

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“Mid-caps are in a sweet spot of growth, which is moving in line with the large-caps in the last one year. However, in small-cap space, we believe it’s going to be a bottom-up play and an earnings visibility play in the near-term before we witness a broad-based recovery,” he suggests.

Investment strategy

That said, analysts do suggest that the overall market valuation has become attractive after the recent correction and investors can start buying large-cap stocks from a medium-to-long term perspective.

“Market valuation has become quite attractive. The Nifty's one-year forward price-to-earnings (PE) is down to 17.3x, which is a 10-year average level. In March 2020, it hit 10-year average and bounced back substantially. However, given the multiple headwinds, we continue to suggest a tilt towards top 250 stocks (in terms of market-cap ranking) till the overall market sentiments improve,” said G Chokkalingam, founder and head of research, Equinomics Research.

As an investment strategy, those at Credit Suisse Wealth Management suggest investors stay with the defensive stocks for now. However, they expect the market sentiment to improve in the second half of calendar year 2023 (CY23) on improved corporate fundamentals, political stability, and positive medium-term economic growth outlook.

“We suggest investors to stay defensive in the current market environment and focus on sectors with high domestic exposure as the global outlook remains unfavorable Given this backdrop, we like banks, cement, autos, multiplexes, and defense sectors in the context of India equity research preference. We also like the pharma sector given its defensive qualities amid the slowing global economy,” wrote Jitendra Gohil, director – global investment management at Credit Suisse Wealth Management India in a recent coauthored note with Premal Kamdar.