A trader monitoring stocks is reflected on a computer screen. (Photographer: Asim Hafeez/Bloomberg)

Why Citi Prefers Large Caps Over Mid Caps

Investors must be cautious about mid-cap stocks as they are still trading at a premium to large caps despite the recent correction.

That’s according to Citi India. Mid caps have outperformed large caps over the past three years. The trend got reversed this year.

The brokerage now advises clients to focus on large caps. “Stay selective, given sustained FII (foreign institutional investor) outflow pressures, premium valuations and worsening domestic macro,” Surendra Goyal, the managing director and head of India research at Citi, wrote in a note to clients. “Market fundamentals look entirely dependent on domestic inflows unless earnings trajectory shifts.”

Mid caps have underperformed despite strong inflows into such funds. There have been cumulative net inflows worth Rs 36,200 crore in the year ended March 2018 compared with Rs 21,400 crore in 2016-17, according to the brokerage. This, Citi says, makes mid-caps even more vulnerable to any signs of a reversal in domestic mutual fund inflows.

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Inclusions And Exclusions

Citi India removed L&T Finance Ltd., DB Corp Ltd., Federal Bank Ltd., and Voltas Ltd. from its top mid-cap picks, and replaced them with Dilip Buildcon Ltd., Dalmia Bharat Ltd., JSW Energy Ltd., and Crompton Greaves Consumer Electricals Ltd.

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