2017 was an amazing year for Indian investors. Nifty index gave almost 30% returns and multiple stocks gave upto 200%-300% returns. Midcaps and smallcaps in particular outperformed.
In 2018 however, investors have been asked to stick to low valuation stocks and lower their expectations from stock markets. Most of the investors after seeing the returns from midcaps in 2017, put a lot of their money in midcap and smallcap stocks but in last 2 weeks these indexes have corrected by almost 2-3% and most of the companies have corrected by 10%.
On 24th Jan itself, MidCap and SmallCap indices fell as much as 0.57 per cent and 0.9 per cent, respectively.
Also some mutual fund advisors are now asking investors to move to large caps where most of the money will be invested. But before we decide to switch, lets answer some questions :
Is This A Short Term Correction Or Long Term ?
If we compare the trend of large cap, mid cap and small cap index, we will notice that all were bullish in 2017. Below data is from 1 Jan 2017 to 31 Dec 2017.
While Nifty 100 (Mostly large cap companies) gave 31% return, midcap and smallcap gave almost 50%+.
Now let’s see the chart of Jan 2018 :
As you can see, While Nifty 100 index has gained 5.6% midcap and smallcap indices have gained 0.7% and 1.8%. Also these indices are now in correction mode mainly because of two reasons :
1) Uday Kotak (Vice Chairman of Kotak Mahindra Bank) cautioned investors that there might be a bubble forming in midcap stocks, where too much money is going. Read this news item here : Midcap stock bubble.
2) High valuations of mid cap and small cap stocks – Most of the mid cap and small cap stocks are trading at 2-3 times large cap valuation. This means they are highly overbought and can correct.
My personal opinion is that these indices could correct further by 2%-3% by Feb 1st week, but this will be a short term correction. I am expecting all the mid cap and small cap stocks to rally after the broader market corrects (after budget the market could see some profit booking and a correction of 400-500 points in Nifty 50 index). This correction could lead to further correction in mid cap and small cap stocks.
Mid caps have a habit of correcting by more than 8-10% every time Nifty 50 corrects.
Now an investor finds it difficult to digest all this data and make decision (myself included). Should we go with large cap stocks or remain invested in mid cap stocks?
So Many Questions Come To Mind… What To Do?
1) What if mid caps outperform large caps this year too?
2) What if large caps outperform midcaps and smallcaps?
3) Should we diversify and invest in some large caps too?
4) Which large caps will be better to invest in?
All these questions are very broad questions. Let me try and demonstrate what happens when you actually try to make decisions with such mindset.
Even if you decide to switch to some large caps, you will find out that almost all the companies are overvalued and it will be difficult to choose companies which can give you 40%-50% return, and if you check the companies which have low valuation, they either posted bad results or are not worth investing in because of some other reason (high debt, weak fundamentals etc.)
The problem is that the whole market is overvalued and will remain like this unless some major event had to correct the market. Because of high liquidity too much money is flowing in and will continue to keep the valuations high.
So assuming large caps are better compared to midcaps and smallcaps, most of the money will now go into these companies. But what will happen when the large cap companies become overvalued because of continuous flow of money? Will they face similar correction as mid caps and small caps? Will money then go into midcaps and smallcaps because they will have cheaper valuations than largecaps?
Personally I feel that even if the midcap index had to face some correction, certain midcap companies could outperform largecaps because the whole idea of investing in 2018 is to “catch them young” (find companies which have good fundamentals and decent growth potential).
The Habit Of Timing The Market
If you look at the chart below, you will find some red points near market highs :
Most of the investors have a mindset of buying at low and selling at high. This happens because of two main reasons :
1) Not much experience with stock market (or investment in general) – I myself have done this in 2017 and noticed that if I had just stuck with my investments I could have made almost 80%-100% more money (although I didn’t invest that much money in 2017 as compared to 2018).
2) Less capital but very high goals – People who start with Rs. 5,000-Rs. 10,000 and want to make it big (turn their investments into 1 Crore or more). While there is nothing wrong with having such goals, when these goals don’t get realized or are threatened (because of bearish sentiments or market corrections) an investor panics and exits the market and then waits for new lows to re-enter. It is very difficult to time the market as no one knows when the market will correct and when it will make new highs.
In both the above cases the investor needs to hold the stocks with conviction (provided he chose good companies to begin with) and go through such minor corrections without exiting or making any changes (*conditions apply). If the general trend is bullish (as in current case of Indian stock market) there shouldn’t be a reason to panic unless your company’s fundamentals get affected.
My Final Thoughts On My Own Portfolio Reshuffling
Most of the companies that I am holding are mid cap (you can see them here : My Portfolio ). Although my portfolio has lost more than 10% gains in past two weeks, I am still holding all the companies and will hold till Feb 2018 last week. If the large caps continue to outperform midcaps and smallc aps then I will make some changes and shift to some large cap stocks.
Besides most of the companies that I am holding would have posted results by Feb 2018 last week and it will be easier for me to decide whether to change my holdings or continue with them.
Let me know what you think and if you have already shifted to large caps or are thinking about doing it.