India's m-cap lags as Sensex scales new highs on post election euphoria

The benchmark indices logged fresh record highs for a third day in a row on Tuesday even though the country’s market capitalisation is yet to cross its previous peak registered nine months ago.

The market value of all companies listed on the BSE stood at Rs 154.6 trillion, Rs 6.4 trillion below its previous peak of Rs 161 trillion on August 31, 2018.

The difference between current and peak market cap is much wider if new equity paper that entered the market in the past nine months is excluded.

On the other hand, the share of Sensex companies in market cap is at the highest levels ever, signalling that the stock market gains have been restricted to a select few stocks. The share of Sensex market cap is currently at 46 per cent of market capitalisation, higher than the 18-month average of 43 per cent. 

In all legs of upward movements since 2018, large-caps have been outperformers. 

After a record run between 2015 and 2017, small- and mid-cap stocks have gone out of favour.

A combination of factors, including regulatory changes and the nature of portfolio inflows, are responsible for lopsided growth in the market, say experts.

A large part of capital inflows into the domestic market over the past one year have been on account of exchange-traded funds (ETFs), which have mainly chased large caps. While domestic inflows into equities have been strong, most fund managers too have shifted their focus to large-caps due to risk aversion and regulatory changes, experts point out.

“After new norms pertaining to reclassification of funds, most mutual funds have restricted their investments to the top 50 or 100 stocks,” says Siddhartha Rastogi, managing director, Ambit Asset Management.

Abhimanyu Sofat, head of research, IIFL, says money has been getting into very few sectors and stocks. “The market has been rewarding select companies which have been consistent in terms of earnings.”

In a recent note, ICICI Securities highlighted the year 2018-19 was the “narrowest” for the market, with only five stocks accounting for 75 per cent of BSE 100 gains.

“It is evident that the current narrow market in general is vulnerable as it is bereft of catalysts to trigger a broad-based rally in stocks — such as big-bang policy reforms, global/domestic demand environment, surge in private investments, strong credit cycle, rising operating leverage or earnings cycle,” the brokerage said in a note dated May 16.

Many, however, say the favourable election results could be a big trigger for market performance to become broad-based. 

Already, investors have started aggressively buying into select mid- and small-cap companies where valuations have taken a beating but there are not too many concerns around growth or corporate governance. The mid- and small-cap indices have outperformed large-caps over the past one week amid the election euphoria.

“Valuations of mid-caps and small-cap stocks, which were frothy and had a premium over large-caps until last year, cooled off significantly due to sharp corrections. This gap in the valuations itself is causing many investors to now turn bullish on these segment,” says a report by Prabhudas Lilladher.

Some experts, however, warn that the latest upward move in mid-caps is on the back of hope and the rally may not have many legs until there are structural changes that improve their fortunes.