After years of mid- and small-cap stocks leading the market rally, large-cap companies could be poised for a stronger phase of performance, according to the latest ‘Thinking Aloud’ note by Axis Mutual Fund.
The fund house believes India’s long-term growth story remains intact, but changing global conditions, attractive valuations and improving domestic economic indicators are creating a stronger case for large-cap companies.
At the same time, it advised investors against taking an extreme market-cap view and instead maintaining a balanced portfolio.
Six factors strengthening the case for large caps
The report highlighted six factors that could support large-cap companies in the coming years.
1. Improving economic growth could support earnings
“Historically, the earnings trajectory of large-cap companies has been closely aligned with nominal GDP growth,” the report noted.
Unlike mid- and small-cap companies, which can grow rapidly by entering new markets or gaining market share, large-cap companies typically rely on broader economic drivers such as credit growth, consumption, capital expenditure and global demand.
It mentioned that “going forward, a more supportive domestic cycle could widen the opportunity set and allow large-cap companies to participate more meaningfully in earnings growth.”
2. Credit growth and consumption remain supportive
The report mentioned that bank credit growth has started picking up after remaining subdued for nearly three years, signalling improving confidence among businesses and consumers.
It also highlighted resilient consumption indicators, including two-wheeler sales, which are often seen as a proxy for rural demand. Together, stronger lending activity and healthy consumption could provide a favourable backdrop for large businesses.
3. Valuations are relatively more attractive
While several mid- and small-cap segments have seen sharp valuation expansion since 2019, many large-cap sectors—including private banks, IT services and the Nifty 50—continue to trade near or below their historical valuation levels.
“Large caps may offer a more balanced risk-reward in case of a macro recovery,” the report noted.
4. Export-oriented sectors could gain
The report noted that the rupee has weakened significantly over the past 18 months against most major currencies, improving the competitiveness of export-oriented businesses.
It identified sectors such as IT, pharmaceuticals, engineering, specialty chemicals, and industrial products as potential beneficiaries.
5. Softer commodity prices may provide relief
According to the report, easing crude oil and industrial commodity prices could reduce input costs for businesses, support profit margins and help contain inflation.
Lower energy prices could also boost household purchasing power and provide greater room for public investment, although it cautioned that this outlook remains dependent on geopolitical developments.
6. Large caps may offer better risk-adjusted returns
The report pointed out that market leadership has historically shifted across market-cap segments. Large caps outperformed after the global financial crisis, while small and mid caps led the 2014-17 cycle, underperformed during 2018-20 and then witnessed another strong phase of outperformance that peaked in 2023.
The periods of sustained outperformance by any market-cap segment have eventually moderated as valuations and earnings expectations adjusted.
“Importantly, the starting point matters for better risk-adjusted returns. When valuations fully reflect growth expectations, future returns tend to rely more on earnings delivery,” the report noted.
Key takeaways for investors
The report highlighted that the strong run in mid- and small-cap stocks does not mean opportunities in the segment have disappeared. However, the investment environment today is different from the early post-pandemic years.
It added that improving nominal GDP growth, supportive credit conditions, resilient domestic demand and relatively reasonable valuations strengthen the case for large-cap companies.
“The next phase may therefore not be about choosing between large caps and small and mid caps. A more balanced approach that includes high-quality large-cap businesses could prove increasingly valuable as market leadership broadens,” the report concluded.
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.