“You make most of your money in a bear market, you just don’t realize it at the time.”
Markets were range-bound in May. While large-cap stocks lagged, mid and small caps delivered strong earnings. Sectors like IT, cement, and insurance performed well, aided by valuation comfort. Financials consolidated, while selective profit booking amid US tariff concerns allowed for reallocation at more attractive levels. The swift market recovery from intra-month lows suggests strong accumulation and broad investor participation.
India’s economic momentum remained strong in FY2024–25, with real GDP expanding by 6.5%, and Q4 (Jan–Mar 2025) posting a robust 7.4% growth, surpassing expectations. Key sectors including construction, manufacturing, and defence led the growth during the quarter.
India has now become the 4th largest economy globally, marking a significant step in its global economic ascent. Projections remain optimistic, with the country potentially becoming the 3rd largest economy by 2028.
While the Industrial Production (IIP) growth moderated to 2.7% in April 2025 (from 3.9% in March), rural demand indicators are improving. Higher Rabi yields after four years, stable crop pricing and rising real rural wages supported by government cash transfers and free electricity schemes in key states have improved rural liquidity and sentiment.
The early onset of the South-West monsoon (eight days ahead of the usual date) under neutral ENSO conditions is expected to benefit the Kharif crop season, further boosting the rural economy.
On the global front, the US economy contracted by 0.2% (annualized) in Q1 2025, with trade weighing heavily on growth. Additionally, a new tax provision in former President Trump’s bill — targeting countries with “discriminatory” tax systems — has unnerved Wall Street and may deter foreign investment in the US. This, along with a potential dollar devaluation, could prompt capital inflows into emerging markets like India.
Key events in June:
- RBI Interest Rate Decision on 6th June. Expect 25 bps rate cut. +ive for markets.
- A team of US officials expected to visit India this month for trade talks, there is a possibility that the two countries may agree on an interim trade pact by June 25. +ive for markets.
- Fed Interest Rate Decision on 18th June. Expect no change. Neutral for markets.
Are Small Caps Overvalued? The best thing to come out of the exercise that the capital market regulator undertook in 2018 to re-categorise mutual funds was standardisation. The definition of large-cap, mid-cap and small-cap funds was standardised so that all equity funds could follow the same definition.
Advances in the equity markets have led to an increase in the market capitalisation of each of these groups of stocks. But the number of these stocks in each of these baskets has remained the same.
Perhaps the time has come for the Securities and Exchange Board of India to expand the baskets. Here’s why.
The size of the problem: As per the current rules, here’s what a large-cap, mid-cap and small-cap stocks look like:
- Large-cap: The 100 largest listed stocks by market capitalization
- Mid-cap: Stocks ranked between 101 and 250 by market capitalization
- Small-cap: Stocks ranked 251 and onwards by market capitalization
The Association of Mutual Funds of India has to update this list every six months, based on data provided by the stock exchanges.
While the definitions of large-cap, mid-cap and small-cap stocks have remained the same since 2018, the market dynamics have changed a lot over the years.
While publishing valuation data of indexes, only top 100-250 stocks are counted in Small Cap Index, while the universe is of 5000 Stocks. This does not reflect the true value of that index and often treated as overvalued.
India is a growing economy and most of the small cap stocks have already become mid-caps by market capitalisation but being treated in small category due to definition hurdle.
Expanding the basket: Given the increase of inflows in mutual funds, it is evident that many fund managers would find the current limit of 100 stocks for large-caps and 150 stocks for mid-caps restrictive. Comparatively, small-cap stocks have a larger universe beyond the 250th stock by market capitalisation.
As a result (but not only because of it), many fund managers in active large-cap funds (and now midcap funds also) find it tough to consistently beat their respective benchmarks. On the other hand, active small-cap funds still have a much bigger universe of stocks at their disposal and do much better than their benchmarks regularly.
Keep in mind how the Indian markets are growing and more SIP money is flowing in. We don’t want to be in a situation where we have a problem of plenty and too much money chasing a few stocks in the large and mid-cap space.
So there may be a need to provide a bigger canvas for large-cap and mid-cap fund managers to operate. And this can be done by tweaking the market-cap bucketing definitions. SEBI should think on this and widen definitions to increase number of large and mid-cap stocks.
Investment Strategy
- Nifty range 23,500-25,500; downside limited.
- Since COVID Govt has spent huge amount in capex, which led to huge growth in economy. Post Trump elections & tariff announcements, Business houses had put a pause on their expansion plans till clarity emerges.
- In last 6 months since tariff announcement, there has been more chaos than clarity and Trump tweets & policy changes every now & then added more fuel to the fire.
- Trump 90 days waiver is ending soon and nobody knows what will happen. Geo-political tensions between Ukraine-Russia, Israel-Iran, India-Pakistan has escalated more than before.
- Downgrade of the US credit rating by Moody’s is increasing bond yields and making more attractive for investors to park money in long term bonds than elsewhere.
- New risk in the form of COVID has emerged. Cases are growing as of now, but to early to press the panic button.
- We expect this chaos to continue for next few months, hence halting any business expansion plans by corporates, resulting in lower growth. Current growth nos. are already factored in by markets and expect to remain sideways for next few months till clarity emerges.
- RBI is expected to further cut rates this year, at least by 50 bps, hence bond yields will increase, making Debt funds attractive. One can expect double digit growth in high secured Debt funds. Hence allocating a 35% ratio in Debt funds this month is recommended.