As I have said before, this is the year of large cap outperformance versus the midcaps and the single most important factor for that is mean reversion.

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Last year, the midcap index went up 48 percent, which was simply not sustainable. But now, an interesting dichotomy is emerging.

The extent of midcap fall coupled with the Nifty rally to near all-time high has made things interesting. Nifty is up 4.5 percent so far this year and the midcap index is down 13.6 percent. What is interesting is that if you take data from the start of 2017, the Nifty is now up 34 percent while the midcap Index is up only 27 percent.

So is the mean reversion over? And are midcaps now set for a fresh rally? Well, this statistic actually conceals one vital aspect. The Nifty rally itself has been extremely narrow. Just look at this table which explains the Nifty contributions this year:

In short, money has been chasing the comfort of highest quality, in process making the expensive stocks even more expensive.

As of now, smart investors are happy putting their money in stocks where they believe they will preserve capital rather than chasing absolute returns. Of course, it’s been a bonus that if you invested in these stocks, you have made far more money than you imagined.

TCS is up 47 percent this year, Kotak up 39 percent, HUL 27 percent, Infosys 26 percent. These are the kind of returns you expect from midcaps, not the bluest of blue chips over a 7 month period. But then, that’s market for you.

First Published:Jul 16, 2018 8:13 AM IST