The euphoric wave that helped push midcap and smallcap stocks to all-time highs is giving way as weaker macros are coming into play and liquidity is drying up.

That's the view coming in from S Krishna Kumar, chief investment office-equity at Sundaram Mutual Fund. According to Kumar, there is a clear divergence where largecaps are outperforming the mid and smallcaps.

In terms of valuations, the premium that the smallcaps enjoyed over the Nifty has also shrunk resulting in BSE Smallcap index trading at a discount to the Nifty or Sensex on a one-year forward.

Despite the recent fall and cheap valuations, the small and midcaps have a good earnings trajectory and the corporate fundamentals have been improving, added Kumar.

In terms of the sector picks, Kumar said that “one must have a diversified portfolio approach. Consumption remains an overarching theme across various portfolios – across auto, auto component, lifestyle products, retail, apparels, brands, entertainment and holidaying."

First Published:Jun 18, 2018 11:00 AM IST