'Mid caps have done better than large caps due to strong earnings growth'

Boasting a tenure of around 14 years, Niket Shah, Fund Manager at Motilal Oswal AMC, has been a seasoned hand at navigating the mid-cap space. He manages the majority of the AMC's active equity space. We recently sat down with Shah to understand the reasons for the mid-cap fund's consistent performance and his outlook for the markets in 2024. The mid and small-cap segment has put up a phenomenal show in 2023, outperforming the broader markets by a big margin. With valuations skyrocketing, do you expect 2024 to be a challenging year? We definitely expect 2024 to be challenging, primarily because of very expensive valuations. This year, the mid-caps and small-caps have done better than the large-cap. The primary reason is that the earnings growth in the last three years, FY20-23, for the mid-cap index has been 48.5 per cent. If you compare that to the large-cap index, it has been 22 to 23 per cent. So obviously, mid-caps have done better than large-caps, primarily due to the strong earnings growth we have seen in the last three years. What is important to understand is that valuations today of the mid-caps are at 24 and a half times on a one-year forward basis versus a longer-term average of 23 times. So mid-caps and small-caps are undoubtedly 7 to 8 per cent more expensive than the longer-term average on valuations. Some of this is also explained by the fact that the growth in the mid-caps has been materially higher than the longer-term averages. From 2010 to 2020, the mid-cap index earnings growth was 6 to 7 per cent, which, from 2020 to 2023, has improved to 48 to 49 per cent. Hence, there has also been a rerating in the multiples of the mid-caps. Until earnings growth continues to remain strong, valuations will remain elevated. But we do believe that earnings growth will also moderate a bit as we go forward because of the higher base, and a lot of the ben