Broader markets have attracted many investors in the last few years, thanks to the stellar returns given by some of the stocks in the universe. However, 2018 could be the year of blue-chip stocks if brokerage estimates were to go by. Analysts are predicting an average eight per cent upside for the Sensex stocks against three-four per cent growth for the BSE mid- and Small-cap indices.
Broader market indices have outperformed Sensex for the last four years thanks to a surge in portfolio flows chasing alpha stocks. However, scales have tilted in favour of large-cap stocks in the last two months as brokerages have upped the target prices of the big companies amid recovery in earnings and macro-economy. On the other hand, the target prices of the mid- and small-cap companies have largely remained little changed.
Analysts say, currently the mid and small-cap segments certainly look overheated as many of the players continue to reel under the pressure of policy initiatives like Goods and Services Tax (GST).
They say the earnings recovery in the smaller companies is still two-three quarters away even as the profits of blue-chip companies are inching towards normalcy starting March quarter.
“Mid and small-cap companies have witnessed a lot of traction in the last few years on account of strong domestic institutional flows chasing these stocks. This has led to a surge in the valuations of these stocks even as earnings disappointed. On the other hand, large-caps seem to be priced favourably but they have underperformed the broader markets,” Prakarsh Gagdani, chief executive officer, 5paisa.com.
The strong surge in the stock prices of mid-cap companies was also on account of anticipation that there would be a significant revival in the earnings cycle and hence the valuations would become more moderate. The BSE mid-cap index is currently trading at a trailing price to earnings (p/e) of 46.7 times while the ratio is whopping 116 times for the BSE small-cap index. In contrast, Sensex currently trades at a moderate 25.5 times.business-standard