Largecaps vs mid, smallcaps: Here’s your answer for wealth creation in 2023

Largecaps vs mid, smallcaps: Here’s your answer for wealth creation in 2023


In 2022, the benchmark Nifty 50 has managed to outperform midcap and smallcap stocks. However, the upside in these indices has been lower in 2022 compared to 2021, due to geopolitical tensions, rising interest rates scenario, inflationary pressures, and other macroeconomic risks which led to extreme volatility. Notably, smallcaps on NSE took a massive beating amidst volatile markets compared to midcaps and largecaps. But the current index ratio indicates that there is more potential for buying in all three indices. However, ICICI Direct expects small-caps and midcaps to outperform the Nifty index over the next 2 years, starting in 2023.

From December 28, 2021, to date, the Nifty 50 has climbed by 5.5% versus the Nifty Midcap 100 whose surge is around 4.3%. However, Nifty Smallcap 100 index has dipped by nearly 12.45% year-on-year.

As per ICICI Direct report, in 2021, Nifty’s year-on-year growth was at 24.1% which was lower than the 46.1% yoy growth in the Nifty Midcap 100 and from 59.3% upside in the Nifty Smallcap 100.

In its market strategy report for 2023, ICICI Direct revealed that analysing market cycles across the last two decades, “we observe that markets usually run up in a block of two to four years before hitting an interim low or witnessing a correction.”

Further, the note added that interestingly, a trend is also evident in the index value ratio (CY end) i.e. from high to low of index value in a block period.

Also, the brokerage’s note highlighted that the average reading in the last four market upcycles depict it being greater for the small-cap domain at 2.6x i.e. from interim low Nifty SmallCap 100 index multiples at 2.6x in the next two to four years. Similar reading is pegged at 2.3x for Nifty Midcap100 & 2x for the Nifty 50. Thus, in an upcycle, the return in small caps is greater than midcaps which are still ahead of large caps (Nifty Index).

Additionally, the report pointed out that in 2022 so far, Nifty’s index ratio is at 1.7x versus 1.8x of the Nifty Midcap 100 and 1.5x Nifty Smallcap 100 index. On this reading, ICICI Direct’s note said, thereby implying upside potential of ~20% for Nifty 50, ~30% for Nifty Midcap 100, and ~50%+ for Nifty SmallCap100 in the next two to three years.

Hence, the brokerage expects small-cap & midcaps to outperform the Nifty Index over the next two to three years, starting CY23E.

On the earnings front, ICICI Direct’s note added that tracking consensus readings from Bloomberg and taking FY19 as the base year given Covid & supply chain-led disruptions in FY20-22, earnings are expected to compound better in small caps (FY19-25 CAGR: 28.5%) & midcaps (26% CAGR) versus large caps (15% CAGR). This adds thrust to our view that with earnings support, wealth creation could be far bigger in small caps, midcaps versus large caps.


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.

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