| That sums the trend in mid and small-cap stocks ever since the rally began in May 2003. Mid-cap and small-cap stocks have continued to outperform large cap companies. |
| What's worrying, however, is the fact that small-cap stocks have been outperforming the rest of the market by a much larger extent in the past year. |
| Between May 2003 and August 2004, small-cap stocks (having a market capitalisation of less than Rs 100 crore as on May 2003) had gained 116.6 per cent in market capitalisation, not much higher than the 112 per cent rise in mid cap stocks (market cap between Rs 100 and Rs 1,000 crore). |
| In the past year, however, small-cap stocks have risen by 225.3 per cent compared with a much lower 83.6 per cent rise in mid-cap stocks. Normally, when frenzy around small cap stocks peaks, it signals a peak in the markets. |
| Needless to say, when there's a correction, stocks which have risen faster are expected to fall at a faster pace. In fact, in the past week, while the Sensex corrected by 3.15 per cent, BSE's Small Cap index fell by 3.4 per cent and BSE's Mid-Cap index fell 3.8 per cent. |
| Alumina |
| In spite of the recent measure by the Chinese government scrapping the duty exemption on tolling of alumina, spot alumina prices may not be hit. Spot alumina prices are currently at approximately $455 a tonne compared with an average $ 300 a tonne in Q4 FY05 and the rally in this commodity has been driven by a large reduction in global inventory, coupled with a tightening of availability globally. |
| China imported about 4.24 million tonne of alumina in the first seven months of CY05, a y-o-y growth of 25.8 percent. Analysts believe that even if Chinese tolling reduces, it will be offset by other factors such as strong demand in other countries. |
| Also, since existing contracts will have to be fulfilled, it might take a long time for the full impact of the reduction in tolling to be felt. On the other hand, production cost for Chinese aluminium producers will rise as a result of the government decision. |
| Meanwhile, global production cuts in aluminium owing to surging electricity costs is expected to result in a deficit of about 400,000 tonne in this metal in CY05. |
| As a result, prices of this non-ferrous metal are expected to improve later this year. Firm prices should help large alumina exporters such as Nalco and Hindalco to continue enjoying buoyant realisations in the medium term. |
| Nalco is also planning to set up a aluminium smelter in a Gulf country by 2009-10, apart from its plan to expand its existing aluminium smelter and alumina production capacity. |
| It is already one of the lowest cost producers of aluminium globally and synergies with its domestic operations should help it to ensure the viability of its overseas project. |
| Screen-based bond trading |
| All the talk of the telephone market being the best market for bond trading has evaporated, and dealers point out that already about half the trades in the market are on the new anonymous screen-based trading system. |
| The fact that the new system has had such a resounding success within such a short time of its debut indicates that the writing is on the wall for bond brokers. |
| After the unqualified success of the collateralised lending and borrowing obligations market, screen-based trading in government securities is the second triumph for modern systems in the debt market. |
| To be sure, the New York bond market is still a predominantly over-the-counter market, but then its stock market even now operates on the open outcry system. |
| What matters is probably the fact that in India, the regulator has come down on the side of screen-based trading and has had the courage to carry it through. |
| In any case, studies in the US have shown that bid-ask spreads on municipal and corporate bonds are very high as a result of the OTC system, and transition to screen-based systems would reduce these spreads. |
| Some dealers believe that one reason for the rapid success of screen-based trading is that trading in the country is predominantly in gilts, which are risk-free""-trading in corporate bonds may not be so smooth. |
| But once counterparty risk has been addressed by the Clearing Corporation, there's no particular reason why trading in corporate bonds too should not pick up. A more serious objection is that it is probably easier to put through large trades through the broker network. |
| But the success of the system shows that the oldest markets are the most difficult to change, while newer ones can leapfrog ahead in the use of technology. The sooner players such as mutual funds are also allowed to use the system the better. |
| With contributions from Mobis Philipose and Amriteshwar Mathur |
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