Illustration: Binay Sinha
V K Sharma is quite taken aback by the current movement in the stock market.
Sharma, who is head, private client group and capital market strategy, HDFC Securities, says that he has never seen the Bombay Stock Exchange Sensitive Index, or Sensex, hitting a lifetime high in one trading session, and the mid-cap
and small-cap indices hitting their 52-week lows in the next trading session. “Never has the disparity been so high and so visible,” says Sharma.
And the numbers show it. Sample this: The total market capitalisation of all stocks listed with the BSE stood at Rs 155.1 trillion when the Sensex hit the last high of 36,283 points in January 2018. On July 12, when the benchmark index hit a new high of 36,548, the total market capitalisation had actually fallen to Rs 148.1 trillion. Clearly, only a few stocks namely, Tata Consultancy Services, Reliance Industries and HDFC Bank, are keeping the benchmark indices buoyant.
Says S Naren, executive director and chief investment
office, ICICI Prudential Mutual Fund: “While Indian markets
are close to all-time highs, we are witnessing the most concentrated performance since 2015 with select stocks outperforming and the breadth in market performance lagging. The stocks that have done well appear very expensive while rest of the market appears reasonably valued.”
Hemang Jani, head, advisory, Sharekhan adds: “The price performance is skewed not only between large-cap and mid-cap
stocks, but it is also uneven among large-caps. For instance, exactly half of the companies –15 – that make up the Sensex have given positive returns whereas the other half has seen erosion in value in the first half of 2018.”
Further evidence comes from the fact that out of 3,315 companies traded on the BSE, only 716 stocks are up and 2,574 stocks are trading down. The majority of the stock market, in other words, is under pain(See Table).
What’s causing this distortion? The economy is witnessing macro uncertainty due to rising crude oil prices and inflation scenario, along with the uncertainty of ongoing trade wars. Market players, consequently, are looking at safer bets rather than multi-baggers. “The focus of market appears to have shifted from chasing ‘alpha’ to more fundamental risk aversion. So till earnings show up across broader markets, and risk appetite and liquidity return, selective large-caps could continue to do well as they are considered safer havens in troubled times,” adds Jani.
Even direct stock investors seem to have become smarter. As Dilip Bhat, joint managing director, Prabhudas Liladhar says: “Instead of buying on dips, investors are selling on the rise and moving to large-cap stocks. At present, it is a stock picker’s market.” In fact, smart investors who entered the mid-cap
and small-cap segments a couple of years back are most likely sitting on decent profits. For them, it is a good opportunity to exit, and either sit on cash or buy good stocks.
The mid-cap and small-cap mess: The mid-cap and small-cap indices have seen their fortunes turn dramatically since the beginning of 2018. Both the mid-cap and small-cap indices have shed 14.8 per cent and 17.8 per cent till date. Apart from international problems and high valuation woes, the recent change in regulations has also led to the correction in mid- and small-caps. The Securities and Exchange Board of India (Sebi) came up with the definition of large- mid- and small-cap funds. After the re-classification, mutual funds need to adhere to the mandate strictly. So, there has been some sell-off by funds.
Then, the Additional Surveillance Measure (ASM) that the market regulator introduced on June 1 caused further trouble. Bhat says that some ASM stocks fell from circuit-to-circuit and never recovered. Many didn't get the opportunity to exit the stocks. However, Sharma feels that mid- and small-caps that have value will recover sooner or later. Large-caps are making new highs and mid- and small-caps are making yearly lows. The latter is likely to make a comeback because it is that space that has to catch-up as and when the economic recovery is visible.
Realignment strategies: Says Jani: “Investors are advised to follow defined asset allocation based on their goal and risk appetite. If there is a mismatch in asset allocation versus risk appetite and goal, it should be realigned with quality large-caps stocks or mutual fund”
Experts believe that it is best if an investor in the current market stays with leaders in a particular sector. If a stock that an investor holds is not among the top two players in the industry, sell the stock. Mutual fund investors in large-cap funds need not worry because their fund managers are most likely to own an HDFC Bank or TCS. Investors in mid-cap and small-cap funds need to give their schemes time. “Given that it is only a couple of quarters of non-performance, investors need to give these schemes more time, say another two-three quarters before taking a call,” says a fund manager. Experts say new investors should go for the Nifty exchange-traded fund (ETF) as it is more liquid compared to other index funds.