Small-Caps vs Large-Caps In 2025: Who Stands Tall In A Volatile Trade Landscape?

Disappointing global cues and rekindled worries about a trade war were the main causes of the significant decline in Indian equity markets following a week-long period of consolidation, with benchmark indices Sensex hovering around the week's low at 75,364.69, the Nifty closing the week at 22,904.40. Concerns of a global trade war were stoked by the imposition of reciprocal tariffs by the US. The Monetary Policy Committee (MPC) meeting on April 9 will be the primary focus before the key macroeconomic releases-IIP and CPI data-due on April 11 and the start of the Q4 earnings season. Hence, the upcoming week is jam-packed with significant domestic and global catalysts as conflicts related to tariffs escalate. According to an interview with Mr. Abhishek Jaiswal, Fund Manager at Finavenue, investors are looking for the best sectors to invest in after IT and metals have underperformed following the US's announcement of higher-than-expected tariffs on major global economies, including a 27% tariff on Indian exports. Here are the market forecast, trends, and vital strategies to reduce risk in the small and mid-cap sector amid global trade uncertainty, suggested by Abhishek Jaiswal.

Considering the global economic challenges and domestic policy changes, how do you see the overall market trajectory in the upcoming quarter?

Indian equity markets are currently presenting trades at attractive entry valuations of 10% below their median PE levels, following their prolonged period of overvaluation. Nominal GDP is projected to grow by 11-12% by 2025, driven highly by INR 1 lakh crore fiscal boost through tax cuts and INR 3 lakh crore in Maha-Kumbh-related spending. Additionally, the RBI is expected to implement cut rates four times, promoting liquidity. However, global risks exist, mainly due to US tariffs and fiscal tightening, which could slow tech-driven growth. On the upside, increased European defence to the changes and industrial spending offer a positive long-term opportunity.

How can investors safeguard their portfolios against primary risks associated with small-cap and mid-cap stocks?

Auto-industry-driven businesses face gusts of pressure due to the reforms in US trade policies. In India, economic growth is gradually stabilizing which makes capex-heavy sectors like railways and manufacturing industries see valuation adjustments. Investors should focus on fundamentally high-yielding sectors like banking and insurance, consumer discretionary, real estate, FMCG and pharmaceuticals to mitigate market risks and their effect on the portfolio. To strengthen portfolio stability, focusing on select large-cap stocks with clear growth potential is the ideal solution.

Given the recent regulatory scrutiny on small-cap funds, what adjustments should be made by fund managers to ensure stability and growth?

Prioritizing diversification across market caps and asset classes should be a priority for fund managers. Private equity and institutional segments offer compelling opportunities, while exposure to debt markets can act as a hedge during disinflationary periods. This allows for a tactical reallocation to equities during corrections. Acquiring multi-assets as a strategy ensures stability while capitalizing on emerging growth trends.

What are the key driving factors behind the projected growth rates for small-cap and mid-cap stocks in 2025?

A projected rise at a CAGR of 18-20% per annum-approximately 1.5 times India's nominal GDP growth for small and mid-cap earnings—is seen in 2025. Given that the current valuations are 10% below median levels, a 20-25% return is achievable through a bottom-up approach in higher-yielding sectors. Key growth drivers include rising domestic consumption, easing monetary policy, falling bond yields, vigorous government capital expenditure, and supportive fiscal policies.

In coming years, how will geopolitical challenges impact the outlook for small-cap companies compared to their large-cap counterparts?

Small-cap companies are more vulnerable to global macro risks and policy shifts, especially export-driven industries. Trade disruptions, currency volatility, and higher borrowing costs can strain smaller businesses and their growth. Large-cap industries, with stronger financial reserves, are better equipped to weather these challenges. Managing risk effectively with the help of reducing exposure to export-heavy small caps, especially in autos, can be the ideal way to handle the scenario.

What effective diversification strategies can help investors minimize risks when investing in small-cap funds?

To maintain a well-balanced portfolio, investors can focus on domestic growing sectors rather than global market trends. Midcaps, which attract significant FII inflows, offer a promising opportunity, while defensive allocations in healthcare, pharma, FMCG, retail, and consumer discretionary can add stability. Moreover, these selective bets in power, real estate, and defence can boost returns. Allocating a portion of the portfolio in bonds can also generate mid-teen returns in a rate-cut environment.

Why is a long-term investment horizon for small-cap investments necessary, especially during market volatility?

Success in small-cap investing comes from patience rather than timing. Identifying high-potential small caps early and holding on to them through their transition into large caps can generate substantial gains. Though market fluctuations are inevitable and equity investments are volatile, long-term returns are driven mostly by earnings growth rather than short-term shifts.

How can investors identify and select small-cap companies with sustainable growth potential?

Investors should track companies with strong fundamentals and institutional backing rather than chasing economic trends. Emphasis should be laid on businesses with high entry barriers to ensure sustained profitability. Different sectors like energy expansion, infrastructure development, capital markets, and manufacturing industries align with India's long-term economic growth goals as mentioned by the government of India, making them potential long-term investment opportunities for investors.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.