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Indian mega-cap stocks are in a bear market, with several top large-cap. stocks have hardly given any returns over the past 2-3 years, the Kotak Institutional Equities said in a report.

“The outcome of various events in the next few months could determine the performance of the ‘three’ distinct markets in India in 1HCY24," the report said.

“Mega-caps are in a bear market, large-caps and quality mid-caps are in a bull market and mid- and small-caps in general are in a bubble market. We prefer mega-cap. stocks, noting their reasonable valuations. We see low returns for the broader market in general."

“We expect large-cap. stocks to do better than mid-cap. And small-cap. stocks over the next 6-12 months assuming that the current euphoria in mid-cap and small-cap stocks fades over time and their valuations realign with their fundamentals. Large-cap stocks have been laggards in general in the market over the past few months, as can be seen in the varied performance of various indices,” the report said.

“We find valuations of large-cap. stocks to be more reasonable compared to their mid-cap. and small-cap. counterparts in the same sector. In fact, several large-cap. stocks have hardly given any returns in the past 2-3 years, which has dragged the performance of the headline indices and even broad indices relative to mid-cap. and small-cap. Indices."

The performance of sectors has also been quite different depending on the mix of large-cap., mid-cap. and small-cap. stocks in the sectors.

"We note that sectors with a high proportion of large-cap. stocks have lagged sectors with a high proportion of mid-cap and small-cap stocks," the report said.

“We attribute the strange performance of the market (abysmal to euphoric depending on which part of the market one is looking at) to the varied investment mood of market participants."

Institutional investors (especially foreign investors) who would invest largely in large-cap. and quality mid-cap. stocks have been more conservative about the Indian market given its rich valuations.

They are positive on the medium-term prospects of India but have generally struggled with the high valuations across the consumption, investment and outsourcing sectors in the past 1-2 years.

On the other hand, retail and high net worth individuals who may invest in mid-cap. and small-cap. stock directly and indirectly (through mid-cap. and small-cap. funds and AIF/PMS funds) seem to be quite ecstatic about mid-cap and small-cap stocks and are not fazed by their rich valuations.

“We do not see many fundamental reasons for the meteoric rise in the stock prices of many mid-cap. and small-cap. stocks in the past few months. The fundamentals of most sectors have not changed much in the past few months.

"However, market sentiment is quite exuberant, as can be seen in steep increase in the prices of many mid-cap and small-cap stocks, huge increase in the number of new retail participants in the mid-cap and small-cap funds.

"The strong performance of the mid-cap. and small-cap. indices and stocks have possibly pushed up return expectations among retail investors, which in turn has resulted in them pouring money into such mid-cap, and small-cap funds," the report said.