Lok Sabha Elections 2024: Strategic Trading Insights for Largecaps and Midcaps – Where to Invest?

• Midcaps continue to lead despite the narrowing outperformance gap with largecaps in May.
• Experts believe largecaps will outperform following Modi’s anticipated win in the upcoming elections.
• “Largecaps are not as overvalued as midcaps,” say market analysts.

Discover the latest insights on the stock market performance amid election results, focusing on the potential shift from midcaps to largecaps.

Midcaps Lead Despite Narrowing Gap

In May, the Nifty50 index experienced significant volatility, recording a 0.6 percent increase month-to-date (MTD), while the Nifty Midcap100 index surged by 2.6 percent. This follows a trend from the previous month where the Nifty rose by 1.2 percent compared to a 2.8 percent rally in the mid-cap index. Overall, for 2024 year-to-date (YTD), the mid-cap index has advanced 13 percent against a 4.6 percent rise in Nifty. Over the last 12 months, the mid-cap index has rallied 55.5 percent versus a 22.3 percent gain in the benchmark.

Election Impact on Market Dynamics

Experts are cautious about the froth formation in the Indian equity market, particularly in the broader markets due to their massive run-up in recent years. In the last three years, the Nifty Midcap index has delivered multibagger returns, surging 103 percent compared to a 47.3 percent gain in Nifty. With the election results just days away and expectations of the incumbent government continuing in office with Narendra Modi as their leader, there is speculation about a potential boost for largecaps. Despite largecaps appearing slightly overvalued, they are not as overvalued as midcaps.

Expert Opinions on Market Outlook

Nishit Master, Portfolio Manager, Axis Securities PMS

According to Nishit Master, “Looking at current valuations at the index level, we believe that index heavyweights would be in a better position for the remaining part of the year, especially if foreign portfolio investors (FPIs) become interested in the Indian markets again after the elections due to the clarity of policy certainty.”

Trivesh D, COO, Tradejini

Trivesh D notes, “A BJP win would probably boost investor confidence, which would be especially advantageous for large-cap firms. Energy, healthcare, and infrastructure are the sectors that stand to gain from it. Since Modi’s flagship economic initiative has been ‘Make in India’, the manufacturing sector is also anticipated to perform better in the post-election rally than the market.”

Diwakar Rana, Senior Research Analyst at Prudent Equity

Diwakar Rana states, “The markets hate uncertainty and as soon as the volatility increases, the smallcaps and midcaps go out of fancy, investors run for capital protection rather than appreciation. The current volatility has led to some buying in the blue-chip companies. For the last 12 years, we have always been small and mid-cap investors and we believe that big wealth is created in the small and mid-cap space and this shall continue in the coming future.”

Ravi Singh, SVP – Retail Research, Religare Broking

Ravi Singh advises, “We believe that largecaps will outperform but as an investor, one should allocate 40% of his portfolio in large-cap stocks for stability and 30% each in small and midcaps for alpha generation over a longer time horizon.”

Conclusion

In conclusion, while midcaps have continued to outperform largecaps, the upcoming election results and the anticipated continuation of the incumbent government under Narendra Modi could shift the momentum in favor of largecaps. Despite concerns about overvaluation, largecaps are seen as better positioned to attract foreign portfolio investors and benefit from policy certainty post-elections. However, the substantial returns from midcaps and smallcaps over the past few years demonstrate their potential to generate significant value, especially for investors willing to embrace volatility. Ultimately, a balanced approach, considering both largecaps for stability and midcaps for growth, might be prudent for navigating the post-election market landscape.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.