While the benchmark indices Sensex and Nifty climbed in the initial hour of Thursday's trade, following the 50 basis points rate cut by the US Federal Reserve, three stocks in the broader market fell for every two that rose, as selling in midcap and smallcap stocks intensified.
Midcap and smallcap indices fell up to 0.6 per cent, even as investor lap up largecap shares in hopes of better returns ahead.
Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India said the sentiment for domestic equities in India, in the near-term, will depend on the prevailing global market sentiment, especially, expectations of soft or hard landing of the US economy.
The domestic economy is on a solid footing and compares favorably over other emerging markets, but valuations here are rich, and this may limit the near-term upside unless there is a runaway global rally, Kulkarni said.
If the probability of a global hard landing rises, Indian equities could witness higher volatility, he added.
In the case of a soft landing scenario, "a prudent strategy would be near-term caution, staggered investment, preference for large caps and longer investment horizon."
In the case of hard landing scenario, he said some profit booking might be desirable, especially in midcap and small caps. He suggested investors buying stock on market dips.
Among midcap stocks, Oil India tanked 4.50 per cent to Rs 568 on BSE. Torrent Power, Laurus Labs, REC, PFC, IRFC and IRCTC fell up to 4 per cent. Lupin, HPCL, Mazagon Shipbuilders and BHEL also declined up to 2.5 per cent.
"Sectors such as defense, railways, and capital goods are trading at high valuations driven by expectations of strong earnings growth. Investors should exercise caution, as any shortfall in these expectations could negatively affect valuations," said Ajit Mishra - SVP, Research, Religare Broking Ltd.
"The time is favourable for reducing the exposure to mid and small caps and increasing the exposure to largecaps. This strategy will play out well in the medium to long run," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
In the smallcap space, Blue Dart declined 4.68 per cent to Rs 8,227.70. PNB Housing, Inox Wind, Honasa Consumer, Chambal Fertilisers, PCBL, Godrej Agro and Century Plyboards Ltd declined up to 5 per cent.
"We continue to believe that style and sector rotation play a meaningful role in generating alpha. Moreover, with a strong catch-up by midcaps and smallcaps in the last couple of months, we still believe their margin of safety (in terms of valuations) at current levels has reduced compared to largecap," Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities.