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Ahmedabad: When the stock market is volatile due to the geo-political and other international issues, large-cap companies have strong balance sheets and also have established business models and experience of going through multiple economic cycles.
This results in greater earnings visibility and stable cash flows and is particularly robust during downturns/uncertainties. In the current environment where earnings spreads are wide and valuations look stretched in some places, large caps offer a more balanced risk reward profile. This ensures greater safety for retail investors,” said Pratik Podar, Vice President (Equities), Bandhan AMC.
In this context, it is necessary to interpret the current valuation gap between large caps and the broader market in terms of fundamentals such as balance sheet strength, pricing power.
Valuation gap should be seen in the context of fundamentals. Large-cap companies generally have stronger balance sheets, better pricing power and sustainable cash flows. This quality becomes even more valuable during uncertain macro periods. While large-cap companies are more sensitive to global liquidity and institutional flows, the question arises as to whether it provides stability or increases volatility in the current macro setup.
Global liquidity and institutional flows create short-term volatility in the face of global risk aversion. “Institutional capital generally favors companies with strong governance, liquidity and earnings visibility, which are more common in large-caps. This can lead to short-term fluctuations.
Large-cap plays a key role during consolidation
Large-cap funds play a key role during periods of market consolidation and high volatility, with retail participation increasing through SIPs. Large-cap funds have historically shown lower volatility than the mid- and small-cap segments. A meaningful allocation to large-caps keeps investors invested throughout market cycles, which is essential for long-term compounded growth.
Large-cap performance to depend on macro-market indices
Market participation in most segments, as well as the performance of large-caps, will depend on key macro and market indices in the coming period. Market returns are also dependent on earnings growth and liquidity. The key factor to watch is the earnings and market dynamics in various sectors. Capitalization has improved broadly. Along with earnings, indicators such as credit growth, capex momentum, and liquidity positions can indicate whether market leadership is expanding.
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