Top 100 companies' share in cash market turnover drops over the last year

Outperformance of the small- and mid-cap indices, coupled with increased retail participation, have spurred the shift, say market experts
The share of the top 100 companies in total cash market turnover has reduced significantly over the last year. From 87 per cent in May 2020, it has fallen to about 50 per cent now. This signals that the action – both in terms of price and volume – has shifted to the broader market.

Outperformance of the small- and mid-cap indices, coupled with increased retail participation, have spurred the shift, say market experts.

“Lots of mutual fund investors have shifted money to the small and mid-caps. And in the last few months, foreign portfolio investors (FPIs) have not invested much in India. They usually invest in top 100 companies. Moreover, retail investors are indulging in speculative trade,” said G Chokkalingam, founder, Equinomics.

In April and May, FPIs were net sellers, selling equities worth Rs 12,613 crore.

The shift in interest in favour of the broader markets comes after a few years of concentration of gains in the market.

“Earlier, the market was very narrow. People were only buying top 100 quality stocks, and participation of foreign funds was more than the local investors. In the last year, retail participation has risen as interest rates have come down drastically. And stock markets offer a better return,” said AK Prabhakar, head of research, IDBI Capital.

The small- and mid-cap indices have been on a tear this year. The BSE MidCap has risen 27 per cent year-to-date, having posted gains in all months of 2021. The BSE SmallCap has rallied 36 per cent this year. In comparison, the BSE 100 index, a gauge for the top 100 stocks’ performance, has risen 14 per cent.

The lockdown-induced restlessness and easy onboarding options from discount brokerages have led to a large influx of retail investors.

“This attracted a lot of buyers and traders into these stocks pulling up their share of volumes. This is also reflected in the fact that in January-May 2021, an average 40 stocks out of NSE 500 touched a 52-week high on a daily basis, compared to 9 and 16, respectively, in 2019 and 2020,” said Deepak Jasani, head, retail research, HDFC Securities.

The euphoria led to institutional participation in mid- and small-cap stocks.

“FPI and domestic institutional investor turnover is concentrated mainly in the top 100 stocks in a normal scenario. However, since January, some of them have joined the bandwagon and have started trading in mid-cap stocks. With Sebi raising peak margin requirements, traders have shifted focus to stocks where there is a possibility of earning more alpha to offset increased costs of keeping high margins and midcaps fit the bill,” added Jasani.

Analysts, however, expressed concerns about this euphoria fizzling out, and said the day confidence takes a hit, there will be a crash as there is not much liquidity to withstand outflows.

“Historically, whenever such huge outperformance happened in the small-caps, it was followed by a huge correction. It is logical — the relative valuation of small-caps gets stretched as compared to large-caps. Secondly, institutional support for long-term investment in broader markets is weak. A lot of short-term money chases this segment,” said Chokkalingam.

He added that investors should at least have 30 per cent of their equity portfolio in large-cap stocks.

Some analysts feel that the good run in broader markets is a precursor to revival in corporate earnings growth.

“We are looking at a 2-3-year robust growth. In markets, the price comes first, and earnings come later. And as the economy revives, earnings will keep coming and justifying the valuations. Some interim profit booking may happen though,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

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