New Delhi, Jan 11 (IANS): Mid-and-small caps have seen a strong rally in the year gone by that has pushed the valuations above historical average thereby warranting caution in the near-term, Aditya Birla Sun Life AMC said in a report.

The fund house is more inclined towards large caps over mid-and-small caps considering their relative valuation differential is near historic highs. However, with the Indian economy expected to do well, the fund house continues to remain structurally positive on the mid-and-smallcap space for the medium-to-long term, the report said.

Considering the positive macro environment, ABSLAMC expects the continuing improvement in the corporate profit to GDP ratio to sustain.

Nifty earnings are expected to grow in the low-to-mid teens on a compounded basis over the next 3 years.

The earnings growth should be broad-based across sectors with Banking and Financials, Auto, Industrials, Infrastructure, Cement, and Real Estate sectors leading from the front.

At the same time, liquidity is expected to improve driven by both domestic and FPI flows. However, sentiment is at its peak and is expected to moderate. Overall, the interplay of earnings growth, liquidity, and sentiment is expected to be supportive for equity markets. Large cap valuations are at just 5 per cent premium to their historical average indicating that valuations are reasonable, the report said.