Why you must adopt a 60:20:20 strategy across large, mid, small-cap stocks

In a month marked by fluctuating investor sentiment, micro-cap indices have emerged as the standout performers in September 2024, recording a gain of 2.4 per cent. This marginally outpaces large-cap indices, such as the Nifty 100, which saw a rise of 2.3%. However, mid and small-cap stocks lagged behind, posting gains of only 1.8% and 1.3%, respectively.

What Are Micro-Caps?

Micro-cap stocks are companies with relatively small market capitalizations, typically defined as having a market value of less than Rs 500 crore (approximately $60 million). These companies are often in the early stages of growth and may operate in niche markets. While micro-caps can offer significant growth potential, they also come with higher risks due to their size, limited resources, and lower trading volumes compared to larger firms.

 

"Micro-caps benefited from strong retail participation and renewed interest from foreign investors. Large caps remained stable, supported by strong corporate earnings and inflows. Meanwhile, small and mid-caps lagged, reflecting valuation concerns and profit booking post their strong year-to-date rallies," said Fisdom Research in a note. 

What’s Next

While mid- and small-cap stocks have shown some weakness after months of outperformance, large caps are better positioned for stability given more attractive valuations and less vulnerability to global uncertainties. Select opportunities may arise in mid- and small-caps, particularly during earnings season, but their upside is limited due to stretched valuations. 

Market Cap Performance: September 2024 (% Change)

"Investors may find it advantageous to rotate into large-cap stocks that offer a balance of growth potential and reduced risk," noted Fisdom Research. 

Metals and consumer durables shine, IT and oil & gas falter

Current Trends

In September 2024, the Metals (+6.6%) and Consumer Durables (+6.4%) sectors were the top performers, driven by Chinese stimulus and a U.S. Fed rate cut. Power (+5.1%) and Realty (+4.4%) also posted solid gains. However, Oil & Gas (-3.5%), PSUs (-2.6%), and IT (-2.6%) were the worst-performing sectors.

Factors at Play

Metals benefited from global demand recovery and China's infrastructure boost. Consumer Durables saw strong sales, with Auto stocks also rising due to higher two-wheeler demand. Pharmaceuticals continued their rally, supported by product launches in the U.S. and a robust domestic market. IT and Oil & Gas faced pressure from weak global demand and lower refining margins.

What’s Next

"The rally in India's stock market is expected to persist, but sectoral rotations may occur. Autos might face headwinds due to rising inventory, while FMCG and pharma are expected to provide safer bets due to stable valuations. Banking stocks may see more selective movements as challenges in deposit mobilization remain," said Fisdom Research in a note.

How should you invest?

The recommendation by Fisdom is to adopt a 60:20:20 allocation strategy across large, mid, and small-cap stocks, focusing on a "buy-on-dip" mentality. This strategic approach comes as micro-cap indices emerged as the standout performers in September 2024, gaining 2.4%, slightly ahead of large-cap peers like the Nifty 100, which recorded a 2.3% increase. In contrast, mid and small-cap stocks lagged, posting gains of only 1.8% and 1.3%, respectively.

In the current environment, the debt market is viewed positively, with Fisdom recommending a barbell strategy that emphasizes duration plays. Factors such as reduced fiscal deficit projections and global bond inclusion are likely to positively impact the bond market.

Gold is also seen as a favorable investment, with analysts suggesting a "buy-on-dip" strategy while maintaining it as a strategic allocation.

Conversely, real estate is viewed negatively, leading experts to recommend investments through Real Estate Investment Trusts (REITs) and realty stocks as more favorable choices. For international equities, a neutral stance is advised, with a suggestion to avoid overweighting in this area.

FPI dominance continues in September 2024, DIIs scale back amid valuation concerns

Current Trends

Foreign Portfolio Investors (FPIs) continued their heavy investment streak for the fourth consecutive month, contributing Rs 57,724 crore to Indian markets. In contrast, Domestic Institutional Investors remained cautious, with investments amounting to ₹31,860 crore, reflecting nearly half of FPI inflows during the period.

Factors at Play

The surge in FPI inflows was largely driven by significant U.S. Federal Reserve interest rate cuts, which spurred foreign investors to seek higher returns in emerging markets like India. DIIs, on the other hand, scaled back their investments, possibly due to concerns over elevated valuations and strong FPI participation. This divergence highlights a cautious approach by domestic investors amidst growing market optimism fueled by foreign investments.

What’s Next

"Looking forward, FPI inflows may face headwinds due to a rally in Chinese stocks and escalating geopolitical tensions in the Middle East. However, DIIs are expected to provide stability, bolstered by strong retail participation and record-high SIP (Systematic Investment Plan) contributions. This could help offset potential FPI outflows, providing a balanced outlook for Indian markets," said Fisdom.