Have the tables turned for mid and smallcaps?

In the past one year, Indian benchmark indices have exhibited a unified upward momentum, despite all odds of a lockdown, economic discomfort, or inflation levels cornering the upper band of the range. All indices, whether Nifty50, Nifty Midcap, or Nifty Smallcap, have demonstrated their ability to continue the bull run. That being said, at the start of this week, investors witnessed some divergence, and markets began to doubt the rally’s sustainability.

While the Nifty50 continued to climb to record highs, small and mid-cap stocks began to show cues of weakness. It is the first time in several months that the broader indices have underperformed the benchmark in a dramatic selloff that was triggered after additional surveillance measures were announced by BSE. Could a circular like this trigger a “deep correction” on Dalal Street? While this was a spark for the fire that followed, it is unlikely the conclusion for the broader indices. In fact, according to July mutual fund data, there has been a positive bias towards small-cap funds, with a 152% MoM jump in inflows versus only a marginal rise of 8% MoM in large-cap funds, indicating that there is still a significant amount of money being diverted towards smaller cap stocks. Hence, the confidence seems to be intact from this segment of the market.

While DIIs are focusing on broader bourses, FPIs have begun to invest in large caps indicating revived interest after a four-month selling. Penny stocks have also been trendy with retail investors now owning almost 70% of the free float, according to Bloomberg Intelligence, while promoters staged a stock sale aggregating to over Rs. 20,000 Crs. The selective approach of various market participants to different parts of our market has been a bonanza, since majority stocks, large and small, are yielding returns for shareholders across the board. Matter of fact, such a momentum-driven rise is typically a cue to be cautious as valuations surpass the fundamentals. Any negative news flow at this juncture will provoke a selloff, as witnessed by mid and small caps midweek. This, however, was a brief halt and the rally may continue for some time.

Event of the week

The number of policies sold in the life insurance market increased by 16.42% YoY in July but new business premium collections decreased by 11.1%. Furthermore, life insurance companies saw their profits plummet as the number of claims surged to 3-4x during the second COVID-19 wave. However, considering that the pandemic has significantly transformed this industry into a pull product rather than a push one, the numbers do not cause major concern. People resorted to purchasing additional policies as a consequence of heightened understanding of the importance of life insurance. And, considering that our insurance premiums as a proportion of GDP remain low in comparison to developed nations, India offers a long runway. As a result, the potential for life insurance remains enormous, and given the traction it has gained recently, trends are expected to improve in the future once the situation normalises.

Technical Outlook

Nifty 50 tested a new milestone of 16,500 this week which is a follow-up buying move, after a consolidation breakout at 15950 resistance. Markets in general are trading bullish, in sync with other major global indices. There is good upside potential as long as 16200 levels are not broken, which is immediate support on declines. Traders are advised to maintain a bullish outlook going ahead.

Expectations for the week ahead

The majority of India Inc.’s first-quarter earnings were stronger than expected and in the absence of a major event, global cues are expected to guide market direction. Although WPI numbers are anticipated to be released in the upcoming week, markets are expected to consider them as a non-event. Investors are recommended to steer clear from securities where valuations seem unreasonable, instead to ride the bull wave mainly on fundamentally sound businesses. Nifty50 closed the week at 16,529.10, up by 1.79%.

(The writer is head of equity research, Samco Securities. Views expressed are personal)