Lopsided stocks market rally has investors weighing other options

The S&P BSE Sensex has risen about 12% from a low in September, with three members - Reliance Industries, ICICI Bank and HDFC Bank - accounting for 61% of all the gains

Investors are starting to weigh the merits of rotating into small- and mid-sized Indian stocks after a few large companies drove a record-breaking rally in the main equity index.

“Leadership in India’s rally has been very narrow,” Tim Moe, chief Asia Pacific equity strategist for Goldman Sachs, said here last week. “Valuations are at the high end of the range, both in historical terms and relative valuation compared with the region as a whole.”

The S&P BSE Sensex has risen about 12 per cent from a low in September, with three members — Reliance Industries, ICICI Bank and HDFC Bank — accounting for 61 per cent of all the gains. The broader market has lagged behind, leaving the valuation gap between smaller firms and the gauge at close to its widest in a decade.

“Many of India’s large-caps are overvalued,” said Sunil Singhania, founder of Abakkus Asset Manager. “Most of them are unlikely to grow at the rate expected of them.” Abakkus has about 75 per centof its $300 million in assets invested in small- and medium-sized stocks. It earlier this year said some quality stocks are likely in a “bubble zone.”

Investors have taken shelter in some of the South Asian nation’s biggest companies amid a credit crunch and the slowest economic growth in six years. That’s added to an extended underperformance by small stocks that goes back to 2017.

Still, Chandresh Nigam, who oversees $14 billion of assets at Axis Asset Management isn’t convinced there’s value in small caps. It is worth paying more for shares of high-quality businesses, he said in an interview last month.

Quality can be expensive, with the Sensex trading at 19 times 12-month blended forward earnings. That’s close to a level that’s proved the ceiling for gains in the past few years.

Yet, the bet has paid off for Axis, with the money manager’s largest equity fund beating 96 per cent of peers in the last five years.