Lack of broader market participation casts shadow on month-long rally

Nifty Midcap 100, Nifty Smallcap 100 struggle even as markets make new highs

The underperformance in the broader markets has cast doubt on the sustainability of the rally seen in the benchmark indices over the past month. From October lows, the benchmark Nifty and Sensex rallied over 8 per cent, with the latter even managing to register fresh all-time highs.

By comparison, the broader market Nifty Midcap 100 and the Nifty Smallcap 100 gained the most — 2 per cent during this period. After the latest correction, the one-month return for the Nifty stands at 3.3 per cent; for the Nifty Midcap 100, at less than a per cent; and for the Nifty Smallcap 100, minus 0.2 per cent.

Market players said in a bullish environment, the broader markets tend to perform better than large-caps. However, lack of participation in the broader markets reveals caution among investors and absence of confidence.

“Market breadth for the entire month is somewhat negative.  The market rally is concentrated in select stocks. Even in the benchmark index, the rally has been in a few sectors and some heavyweights like Reliance Industries. Health care and metal stocks have not rallied. Investors are circumspect due to the usual nervousness ahead of elections,” said A K Prabhakar, head of research, IDBI Capital.

Last week, the benchmark Sensex recorded new highs and the Nifty was less than 40 points away from surpassing its record closing high of 18,477 made on October 18, 2021.

By comparison, the Nifty Midcap 100 is 6 per cent below its record close of 32,885 made at the same time. The Nifty Smallcap 100 is currently 20 per cent below its record high of 11,981 hit on January 17 this year.

Experts say the underperformance of the broader market could have to do with sectoral composition of these indices and the latest financial performance.

“The July-September quarter results of many small-cap companies fell short of expectation. Many companies in the pharmaceutical and chemical space are in the mid and small-cap space than in the large-cap space. Poor performance of these sectors have affected the performance of the broader markets. Banking, financial services and insurance stocks in the mid- and small-cap space are very minuscule, whereas their presence is strong on the indices. The momentum in the banking and finance stocks helped the benchmark indices,” observes Chokkalingam G, founder, Equinomics Research & Advisory.

The financial sector weighting in the Nifty and the Sensex is much higher, compared to the overall market. As on October 31, the financial services sector constituted 37 per cent of the total Nifty50 weighting and only 30.6 per cent of the Nifty 500. Over the past month, the Nifty Financial Services Index has been an outperformer, with 4.2 per cent gain.

The broader market underperformance comes, notwithstanding strong foreign portfolio investor (FPI) flows this month at over Rs 30,000 crore. Experts say FPI largely bet on large-caps, while small- and mid-caps need active retail participation.

“Rising retail participation augurs well for the robust outlook of the domestic markets.  We maintain a robust outlook for the domestic equity markets in the short term. The only possible risk is any sudden significant reversal of falling global oil prices,” added Chokkalingam.