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Markets in India were on a roll during the calendar year 2023. The interesting part of the rally last year was the outperformance by many lengths of the midcap and Smallcap space.

This outperformance was to a great extent responsible for bringing a large number of retail and new investors to the market. Testament to this fact was the number of demat accounts that have been opened and also the sustained increase in investments in mutual funds through SIP or systematic investment plans.

Let us take a look at the performance of indices last calendar year. BSESENSEX gained 11,399.52 points or 18.74 per cent to close at 72,240.26 points. NIFTY gained 3,626.10 points or 20.03 per cent to close at 21,731.40 points.

BSEMIDCAP gained 11,524.72 points or 45.53 per cent to close at 36,839.22 points. BSESMALLCAP gained 13,746.97 points or 47.52 per cent to close at 42,673.76 points.

Some of the factors for the rally which was skewed to a great extent with about 75 per cent of the gains coming in the last two months of the calendar year and about 25 per cent in the first ten months was linked to the election results of five states declared on the 3rd of December.

Stock markets in India are of the firm opinion that the Assembly election results and developments over the next eight weeks have put the current government in pole position to win the general elections due in April-May 2024. This has led to the exuberance in the markets over the recent months.

The questions that come to mind are twofold. The first, is how markets fare in the current calendar year 2024. The second and more important question is where one should invest.

The second question is the more difficult one as to expect markets to see the small and midcap space to continue their outperformance like last year seems quite difficult and also unprecedented. One needs to look for safety after a superlative performance.

Let us look at the performance over the first four weeks of the current year. BSESENSEX has lost 1,539.59 points or 2.13 per cent to close at 70,700.67 points. NIFTY has lost 378.80 points or 1.74 per cent to close at 21,352.60 points.

BSEMIDCAP has gained 907.07 points or 2.46 per cent to close at 37,746.26 points. BSESMALLCAP has gained 1,689.98 points to close at 44,363.74 points. While so far, the optics seems to be in favour of the Small Cap and midcap space, reality is warning of something different.

Results for the third quarter, October to December 23 are currently on. The results declared so far are a mixed bag with some good and some average and many more below expectations.

Suffice to say that the expected growth from the universe of companies in terms of revenues and profits is not there. Further, the bulk of the results from the midcap and Smallcap space are yet to be declared. These results typically come in the third fortnight of the reporting season. More so, they are in the second week of February which is still some time away.

Markets are generally expected to do well riding into the general elections which are three to four months away. Post the results of these elections being declared one should expect a euphoric blast off if the government of the day wins and a sharp correction if they lose.

Even if they win post the blast, there would be a substantial correction after a sustained rally. Action always happens in the large cap stocks at such times and the small cap stocks react a little later, but in many such cases these stocks become unsalable as they hit lower circuit down.

Coming back to where one should invest, I believe safety lies in the large cap stocks on two counts.

First, the performance last year eliminates or makes a repetition of last year's performance almost impossible. Second, the valuations of the sector leave little or no comfort to buy these stocks at current valuations. If fresh buying cannot be done, the possibility of prices moving up and returns being made becomes little or quite difficult.

For the record it may be stated that the movements in the midcap and Smallcap sectors have become quite volatile and if one may add, dangerous. Movement on an intraday basis of 2-3 per cent on many days has started happening.

This movement is in both directions and the same is swift without giving an opportunity to exit open positions. It happened thrice in the last seven trading sessions. This indicates that we are heading to a sharp correction sooner than later.

To conclude, expect gains from stock markets to taper as we go forward. Second, the gains would be much more spread out in terms of smaller rallies and taking longer to achieve.

Finally, it’s better to spread yourself and invest in large cap stocks as there would be safety in these counters. This is also the segment where FPIs are most happy in investing.