Mid-caps may come under pressure and underperform in the short term. But over the long term, they do well. There are several data points to support this contention. To understand why, look at one factor – cost of capital. Consider: Fifteen years back, a company from a large and reputed industrial house raised money by floating corporate bonds at X% interest. A mid-size company would raise money at X% plus 200 basis points – paying 2% more for capital. Today, that large company is still raising money at “X%”, but what has changed is that the mid-sized company is also raising money at X%. The reason: Capital is now more easily available. The mid-cap has improved its balance sheet, which may be smaller than the large company, but, in terms of quality, is probably as good. So it is bound to do well because the quality of the balance sheet is what determines PE multiples.
