HSBC Global Research prefers large-caps but sees opportunities in the current mid-cap sell-off too. The research house remains constructive on the broader market and ruled out any deep sell-off in mid-caps from current levels.
It said that mid-cap valuations had come down to the five-year mean and that the mid-cap market breadth had declined to 73 per cent from 90 per cent and above at the beginning of the year (60 per cent being the normal cycle average breadth) — signalling some potential but limited downside.
HSBC said the mid-cap premium to large caps had fallen to about 17 per cent from 30 per cent in January, which appears to be in the mid-cycle range.
Correction in 2018
Comparing the current sell-off to that of 2018, the research house noted that both periods align with nearly four years of prior outperformance of small- and mid-cap names over the broader market. The bull run preceding the correction exhibited similar trends in both contexts, with small-cap and mid-cap compound annual growth rates (CAGRs) of about 30 per cent and 27 per cent, respectively.
What is different this time is that the domestic macro is now much stronger with a 6.9 per cent GDP growth rate versus 3.9 per cent in 2018. The 2018 crash was driven by a broader market sell-off on peak valuation (Nifty premium of 23 per cent premium to previous five-year mean) while the broader market valuation today was still palatable (Nifty premium of 8 per cent to five-year mean).
The year 2018 was characterised by several other adverse events such as the Infrastructure Leasing & Financial Services (IL&FS)-led crisis, LTCG tax and the global tightening cycle. In the current context, there is hope of rate cuts in the second half of the year. What’s more, retail flows through SIPs have more than doubled today to a ₹160-lakh crore plus monthly run rate, which should provide continued support to the market.
Earnings of mid- and small-cap stocks witnessed a sharper downgrade in 2018 on rich expectations (22 per cent), while the current expectation at 15 per cent is more realistic, said HSBC.
“Small-cap and mid-cap corrections have triggered some concern as to the possibility of a deeper correction as in 2018. We think the current context is a lot more favourable than that of 2018. In aggregate, a fall of 20-30 per cent is unlikely in our view. Nonetheless, we prefer large-caps in 2024, but see mid-cap opportunities in sell-off too,” HSBC Global Research observed.
