The sharp increase in volatility in the past few days will tend to drive investors further towards large-cap stocks. Small- and mid-cap stocks tend to see an increase in volatility when there is a global uncertainty which tends to drive investors to the relatively less volatile large-caps.
This past week, markets were roiled by a falling rupee which breached the Rs 72 mark against the dollar sending anxiety pangs down the markets. Stocks pulled back sharply from their highs as the Sensex tumbled over 920 points from its recent highs, sliding nearly 2.5 percent the past week. The rupee has since pulled back to Rs 71.75.
The fall is likely to see the divide between large- and small-caps gets sharper. In times like these, investors are more likely to shift to the relatively less choppy large caps. Small caps tend to get more volatile and given that over the next few months there is expected to be a lot of noise due to upcoming state and national elections, small cap stocks can remain underwater for a lengthened period of time.
“Large investors increase allocations to large caps when the expectations of volatility increases, and we are at a point where the market volatility is inching higher. Investors don't like a market that is choppy which is why large caps will be preferred,” says Naveen Kulkarni, head of research, Reliance Securities.
In the last few months, mid- and small-caps were being churned as mutual funds had to re-jig their portfolios as per a new set of classification norms that were ushered in to standardise mutual fund holdings as each individual theme mandate. A large cap fund now has to predominantly invest in large cap stocks as per the new classification.
Mid-cap and small-caps were replaced during the last few months for the large-caps. Experts say that investors don’t like volatility and a up and down moving market, but instead prefer a market that is shows a clear trend.
Going by the volatility and changes in the economic conditions with GST coming in, smaller companies could see a drag in profit growth. The ongoing formalisation of the economy will also see more business moving to the larger companies leading to a favourable assessment of the large companies.
“Big investors think in terms of owning businesses and large cap stocks fits this requirement better. Hence they tend to take a longer term view of these stocks,” avers Kulkarni.
In the recent market correction, over a 100 stocks hit new 52-week lows. The stock market rise has also remained concentrated among a few large-cap stocks. The Sensex lost 0.78 percent the last week as towards the end of the week markets started to rebound gaining over 200 points. BSE Mid and Small Cap indices, however, lost -1.89 and -1.18 percent respectively signaling that the large caps continue to see investor interest.