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In recent weeks, stock markets have been hitting record highs, with the Sensex topping the 27,000 mark and the Nifty crossing 8,000. But the rise in the broader markets, the mid- and small-cap indices, since the beginning of July hasn’t been as good. This is because investors worry the growth in earnings in small-cap and mid-cap companies might be delayed.
“While the price-to-earnings valuation of both large-cap and mid-cap indices have shot up significantly, there are fears the earnings growth in the mid-cap sector will be delayed a bit. So, it is logical to expect investors who believe the pace of mid-cap earnings to be slower will prefer to under-weigh mid-caps at current levels,” says Nilesh Shah, managing director and chief executive, Axis Capital.
The consolidated trailing 12-month price-to-earnings multiple of the Sensex is 19.27, of the mid-cap index is 23.63 and the small-cap one is 30.62, according to Bloomberg data.
If one considers the period since the beginning of the year, the story is completely different. Since January, the Sensex has risen 29.05 per cent year-to-date, while the mid- and small-cap indices have risen 46.05 per cent and 66.65 per cent, respectively. By comparison, since the beginning of July, the Sensex is up 7.5 per cent, while the mid- and small-cap indices are up 4.42 per cent and 6.36 per cent, respectively. The fillip in the last two figures followed the mid- and small-cap indices rising 1.29 per cent and 2.11 per cent, respectively, on Monday.
Rakesh Arora, managing director and head of research, Macquarie Capital, says: “The small-cap and mid-cap indices had run up much faster than large caps. Now, there has been some correction because while there is a new government, there hasn’t been much change on the ground.” He says the mid- and small-cap segments might continue to be range-bound for some more time, adding these might see correction till there is more clarity on earnings, as well as changes on the ground. “Those in the mid- and small-cap segments are mostly industrials, which will grow only when things change at the ground level. Currently, the rally is being led by defensives,” he adds.
Though there hasn’t been a slowdown in inflows from foreign institutional investors, these have started moving into debt more aggressively. Between July and September 4, investment in equities was $3.73 billion, while for debt, this stood at $7.42 billion. For the January-June period, equities attracted $9.92 billion, while investment in debt was $10.41 billion.
Alex Mathews, head of research, Geojit BNP Paribas Financials, says the market seems to be in overbought territory, adding a slight correction might be due.
“The current trends indicate there is sector rotation on a daily basis. Further, the momentum in the broader markets seems to be slowing, as investors are turning cautious after some stocks surged about 100 per cent within a short period.” In case the benchmark indices start correcting, stocks in the broader market that have risen sharply could see profit-taking and remain range-bound, though news related to stock-specific action isn’t ruled out.
