Bharti AXA Life's CIO said that midcap and smallcap stocks are expensive while large caps are cheap, but the rebalancing will happen only when earnings differential narrows
Midcap and smallcap stocks will give way to large caps once the earnings-growth lead begins to narrow, said Rahul Bhuskute, Chief Investment Officer at Bharti AXA Life Insurance, in reply to questions asked in an email interview with Business Standard on October 15, 2026.
In his answers, Bhuskute, who also heads equity research at Bharti AXA Life, said that high-growth mid and smallcaps have turned expensive while the rest of the market is cheap. He also argued that a rebalancing was likely to happen but only when the earnings growth differential was eliminated and large caps needed inflows from foreign investors to take off.
Excerpts follow (interview conducted on October 15, 2026):
Why have midcap and smallcap stocks done better than large caps?
Primarily due to better earnings. The narrative that mid and smallcaps are safe havens to park money in the face of foreign selling is correct only partly. These segments' earnings per share (EPS) have compounded at 17% a year for the past five years, as against 12% for the Nifty. The recent FII selling, which has disproportionately impacted the index heavyweights, was only an extension of the trend.
When is the rebalancing likely to happen?
"A market rebalancing is inevitable," said Bhuskute, but the rotation from mid and smallcaps to large caps is unlikely to happen anytime soon as for now, "the earnings growth differential is still significant". Even then, said Bhuskute, one would need a change in sentiment among foreign investors for large caps to outperform substantially, which may not happen.
Are large caps really cheap?
They are cheap on one count. The Nifty trades at 16.1 times FY28 earnings estimates compared to a historical average multiple of 19 times, said Bhuskute. He expects FY27 earnings to grow by 17-18% for the Nifty. However, Bhuskute is of the view that markets will be "range bound" until commodity prices and long-dated bond yields stabilize, despite seeing more opportunities than threats.
How did the markets react on October 15, 2026?
The major indices jumped on October 15. The Sensex closed higher by over 1,500 points at an intraday high of 74,330, while the Nifty 50 reclaimed the 23,000 level, according to Business Standard. Apart from the large caps, the broader markets also participated, albeit to a lesser extent. The Nifty Midcap 100 closed up 0.38% and the Nifty Smallcap 100 closed up 0.26%, as of the time of reporting.
Geojit Securities' VK Vijayakumar said the correction in AI stocks was a good omen for India as the foreign investors who have been dumping Indian stocks in pursuit of AI companies will pause and possibly reverse the selling. However, the view is not necessarily conclusive.
What else did he say?
On Q2FY27 results: Aggregate profits are expected to grow at a double-digit rate, led by Financials, Energy and Telecom, while margins in Autos were likely to be under pressure due to higher input costs.
On downgrades: "Most of the downgrades related to the West Asia conflict are already priced in," said Bhuskute. He added that higher-for-longer oil prices could trigger a second wave.
On banks vs. NBFCs: Bhuskute is positive on banks' ability to repricing loans faster than deposits but warned of near-term margin compression for NBFCs.
On positioning: Bharti AXA Life is positive on Financials, Telecom, Discretionary Consumer, Defence and select Industrials. The firm is also positive on new-age companies that are emerging as large caps with scalable profits.
On cash: The company is not sitting in cash for long.
Business Fortune reports that while Bhuskute's views are a timely reminder, they are essentially a timing call. Midcap and smallcap stocks have seen their earnings growth lead the pack for the past five years and it is this headwind that makes them expensive. Large caps, on the other hand, have been exceptionally cheap for a long time and unless their growth rates catch up with those of mid and smallcaps and the foreign investors begin to rotate funds into Indian large caps, the promised rebalancing will remain a distant dream, a possibility only when the aforementioned conditions are met.
FAQs
- Will midcap and smallcap stocks underperform large caps soon?
Bhuskute, in his capacity as CIO, did not give a specific time frame for this to happen. It will only happen, he said, when the earnings-growth gap between the two closes.
- Why are midcap and smallcap stocks called expensive?
Bhuskute said that high-growth mid and smallcaps have turned expensive while the rest of the market is cheap. He did not give a P/E ratio for reference.
- What is the Nifty valuation according to the Bharti AXA Life CIO?
It is cheap compared to its historical averages, said Bhuskute, giving the P/E ratio of 16.1x for FY28 estimates.
- What did the Sensex and Nifty do on October 15, 2026?
The Sensex closed higher by over 1,500 points at an intraday high of 74,330, while the Nifty 50 reclaimed the 23,000 level, according to Business Standard.
- Which sectors does Bharti AXA Life prefer?
Financials, Telecom, Discretionary Consumer, Defence and select Industrials, plus some new-age companies, which are large caps with scalable profits.
Sources
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