Large caps, midcaps or small caps? Anirudh Garg of Invasset PMS on what to accumulate in this market

Domestic equity markets continued to stay in positive territory on Monday (March 10) after snapping a three-week losing streak for the week ended March 7.

On the other hand, broader markets also showed strength with the BSE Midcap and BSE Smallcap indices rallying, midcap stocks leading the way 3% and 6%, respectively, last week. Will the momentum sustain going ahead?

Where should an investor zero in this market? Which sectors will deliver a solid return going ahead? In an interaction with Business Today, Anirudh Garg, Partner and Fund Manager at Invasset PMS, says that the recent correction in the stock markets presents an excellent opportunity for investors with a long-term horizon. Edited experts:

BT: The domestic equity markets have experienced a significant correction since October 2024. How do you see the trend unfolding in the coming months?

Garg: The Indian equity markets have witnessed a substantial correction since October 2024, with many quality stocks now available at a 35-40% discount from their recent highs. While short-term volatility persists, we believe this correction presents a golden opportunity for investors with a long-term horizon.

Historically, such deep corrections have proven to be ideal accumulation phases before the next major uptrend. India’s economic fundamentals remain strong—robust GDP growth, rising corporate earnings, and structural reforms continue to support the long-term bull case. The correction has been driven largely by liquidity tightening, global uncertainties, and sectoral rotations, but these factors are cyclical rather than structural.

We hold a bullish stance for the next two years, as we expect earnings resilience, interest rate stabilisation, and domestic liquidity flows to drive a sharp rebound. Additionally, sectors such as capital goods and pharmaceuticals are trading at highly attractive valuations, making them potential outperformers in the next cycle.

For investors, this phase is not a time for fear but rather for strategic accumulation. History favours those who invest in corrections rather than those who panic during them. This is an opportunity to position portfolios for the next growth wave.

BT: Where should investors focus for the next 12 months—large caps, mid-caps, or small caps?

Garg: Over the next 12 months, midcaps and small caps offer the most attractive investment opportunities. The recent correction has led to sharp valuation resets, with many fundamentally strong mid and small-cap companies now trading at 35-40% discounts from their highs.

Historically, these segments have outperformed large caps in recovery cycles, and we expect this trend to hold as earnings growth remains strong. Additionally, mid and small-cap companies tend to be more agile and responsive to economic upturns, allowing them to grow faster when market sentiment turns. As interest rates stabilise and macro conditions improve, we foresee a re-rating in these segments, driving strong upside potential.

While large caps provide defensive stability, they currently lack the high-growth potential seen in select mid and small-cap opportunities. For investors with a 12–24-month horizon, this is an opportune time to accumulate quality mid and small-cap stocks with strong balance sheets and scalable businesses. The next bull run will likely be led by these high-growth companies, and positioning early can lead to outsized returns.

BT: For sector-specific investors, which sectors look promising right now, and why? What are the key challenges you foresee in the current market environment?

Garg: In the current market environment, several sectors stand out as promising opportunities, particularly those benefiting from global supply chain shifts and domestic economic tailwinds.

We are bullish on the pharmaceutical sector, especially in the CDMO (Contract Development and Manufacturing Organization) and CMO (Contract Manufacturing Organization) segments. With global pharma companies diversifying away from China under the China Plus One strategy, Indian CDMO and CMO players are well-positioned to gain market share. The strong regulatory framework, cost competitiveness, and increasing outsourcing trends make this a compelling long-term play.

Similarly, select textile stocks stand to benefit from the Bangladesh Plus One theme. As global buyers look to diversify sourcing beyond Bangladesh, India’s well-integrated textile ecosystem, improving export incentives, and a depreciated rupee provide a favourable backdrop for growth in this space.

Stock market intermediaries such as brokerage firms, depositories, and exchanges remain attractive, given India’s rising retail participation, increasing demat account openings, and the deepening of financial markets. Despite market corrections, structural trends in financialisation remain intact.

The capital goods sector is another high-conviction bet, supported by strong government spending on infrastructure, private capex recovery, and the PLI (Production-Linked Incentive) scheme. This sector is poised to benefit from India’s long-term industrial growth.

Finally, consumer durables remain a strong play on rising disposable incomes, premiumisation trends, and urbanization.

BT: With over 1,000 small-cap stocks falling more than 50% from their 52-week highs, do you anticipate further downside in the broader market?

Garg: We believe the worst of the correction is behind us, and the downside from current levels is limited compared to the significant upside potential over the next 12-24 months. Market corrections of this magnitude typically create deep value opportunities, especially in fundamentally strong businesses that were dragged down due to sentiment-driven selling rather than deteriorating fundamentals. Historically, such phases have been ideal accumulation periods before a strong rebound. India’s economic growth remains robust, corporate earnings continue to expand, and key sectors are well-positioned for recovery.

Additionally, with interest rates stabilising and global liquidity conditions expected to improve, market sentiment is likely to turn positive, leading to a revival in midcaps and small caps, which tend to recover faster in the post-correction phases. While near-term volatility may persist, the broader trend remains bullish. Investors who take a disciplined approach and accumulate quality stocks at these levels are likely to benefit significantly in the next market upcycle.

BT: Why are FIIs cautious about the Indian equity markets, and what is driving their exit? When do you expect them to return?

Garg: Foreign Institutional Investors (FIIs) have been cautious about the Indian equity markets in recent months, driven by a combination of global and domestic factors. One of the primary reasons for their exit was the relative attractiveness of Chinese equities, where valuations had become significantly cheaper after prolonged underperformance. With global funds constantly rotating capital to optimise returns, many FIIs saw an opportunity in China at a time when Indian midcap and small-cap valuations appeared stretched.

Another key factor was the strengthening of the US dollar against the rupee, which reduced the appeal of Indian assets. A weaker rupee often erodes FIIs' returns in dollar terms, making capital outflows more pronounced. Simultaneously, rising US bond yields, particularly the 10-year treasury yield, provided an attractive fixed-income alternative, prompting a shift from emerging market equities to safer, higher-yielding debt instruments.

However, the landscape is now changing. With Indian equities having undergone a significant correction, valuations have moderated, particularly in the midcap and small cap space, making the market attractive once again.

Historically, FII outflows during corrections have been followed by strong inflows once valuations become favourable, and we anticipate a similar trend playing out in the coming quarters.