Bernstein Favors Large-Caps, Cautious On Small/Mid-Caps

Cautious Stance on India Exposure Despite Market Rebound

Bernstein has maintained a cautious approach toward Indian equities, advising investors against increasing exposure to small and mid-cap (SMID) stocks or high-volatility segments. Despite early indications of a potential market turnaround, the firm remains focused on risk management and selective stock positioning.

Preference for Large-Cap and Low-Volatility Stocks

The investment research firm continues to favor large-cap and low-volatility stocks, citing their relative affordability and strong earnings momentum. These segments have delivered steady returns, outperforming the broader market by 4%-6% year-to-date (YTD).

In contrast, small and mid-cap stocks, along with high-volatility equities, have underperformed significantly, showing a decline of 12%-14% YTD. Bernstein believes these segments are still expensive, trading above +1 standard deviation levels, making them less attractive for fresh investment.

Signs of Earnings Recovery in Select Sectors

The firm acknowledges that the earnings downgrade cycle is showing signs of stabilizing, particularly in key sectors like materials, energy, and consumer staples. However, the clearest signs of earnings recovery are visible in large-cap, low-volatility, and high-quality stocks.

Bernstein’s analysis highlights that these segments are benefiting from strong earnings tailwinds, making them a safer bet compared to more volatile investments.

Foreign Investment Trends and SIP Flow Concerns

Foreign Institutional Investor (FII) outflows, which amounted to $16.3 billion YTD, appear to have stabilized. However, a new concern is emerging in the form of slowing domestic Systematic Investment Plan (SIP) inflows.

Historically, a decline in SIP flows has been linked to market drawdowns, raising caution among investors. Bernstein suggests that while FII outflows may have reached a bottom, the weakness in domestic investments could impact overall market stability.

Valuation-Based Investment Strategy

Despite the recent market recovery, Bernstein continues to base its investment strategy on relative valuations rather than short-term market movements. The firm emphasizes that large-cap and low-volatility stocks remain the most attractive segments due to their lower valuation premiums and earnings resilience.

Final Takeaway: Stick to Defensive Plays

For investors navigating the current market scenario, Bernstein’s recommendation remains clear: prioritize large-cap and low-volatility stocks while avoiding high-risk small and mid-caps. With valuations still stretched in certain sectors, a cautious and earnings-driven approach is the key to navigating India’s equity markets effectively.