Market outlook: Nifty50 index may be on course for the 11,400 level

What is the reason for divergent performance of large and mid-cap indices?

The markets opened in positive territory on Thursday, with the Sensex breaching the 37,000 mark for the first time ever in early trade. On the National Stock Exchange (NSE), the Nifty50 index, too crossed its previous record high to scale a fresh high of 11,179.60 levels in intra-day trade.

We had stuck our neck out at the beginning of the month and said that the markets will reach a new high before the Independence Day.

However, the usual bonhomie associated with a new high, is missing. The discordant note of the markets can be gauged from the fact that a day after the S&P BSE Sensex made a new high earlier this month, the NSE Small-Cap index hit a new 52-week low. This is the only time in history we have seen where there is so much disparity between the large-caps and the mid-caps. The NSE Mid-Cap Index is still down 15.30% from its peak and the Small Cap index down 24.95%.

Before we arrive at a conclusion on where the markets are headed, we need to understand the reason for this divergent performance of the large-and the mid-cap indices.

The combination of regulatory changes in the way the mutual funds classify their schemes and higher margins put by the exchanges on stocks saw stocks in small and mid-cap space cooling off. The incoming MF money was now chasing large-caps, creating dichotomy. It was virtually a tale of two markets.

The reasons, as we now see, were purely technical in nature and not related to deterioration in earnings.

It would be logical to expect the mid-cap and the small-cap segment to start inching higher. Since a large number of stocks in this segment have been battered badly, valuations of many small-caps have become attractive.

PMS (portfolio management) money should have normally addressed this market. But they are the ones who have lost money. So, investors may be reluctant to invest via the PMS route. 

With July precipitation making up for the June shortfall, the monsoon is now back on track. This augurs well for our farmers, the ruling party and the markets. Another event – the no-confidence motion defeated successfully by the Narendra Modi –led government last week will prove to be positive as the markets prepare for the assembly and the 2019 general elections. The opposition unity, which was at its peak at the time of government formation in Karnataka, was many shades weaker in the latest episode in the parliament.

Crude oil prices, currency, trade wars and doubts about 2019 outcome were some of the reasons for the markets to be sceptic till now. Since these were front-loaded, the markets will take note of the changed scenario and move higher.

Corporate earnings, too, are ready to leapfrog from here on.  In the years 2013-17 the Nifty earnings grew at a compounded annual growth rate (CAGR) of 3 per cent. The real jump will come in 2019 when we see a growth of 22 per cent. 

We expect the Nifty to move higher in the August series. Investors, who were shunning small-cap stocks on fears that the Index may fall, are now likely to be more confident of the moves of the broader indices and start investing in the small-and mid-cap stocks.

Once the Nifty closes above the 11,171 mark, expect this to become the new support level for the index. The next resistance could come in at 11395 – 11,400 levels, a 100% extension level of swing seen from 9,952 (bottom of March 23) to 10,929 (top of May 15) and from 10,929 to 10,417 (bottom of May 23).

The author is Head Private Client Group & Capital Market Strategy at HDFC Securities. Views expressed are his own.