India’s benchmark stock indices are roaring again, with the Nifty and the Sensex scaling all-time highs on Friday, crossing the 11,200 and 37,300 levels, respectively. A result largely of increased buying by foreign institutional investors and expectations of strong first-quarter earnings results, it took the Sensex just 13 trading sessions to move from 36,000 to 37,000 points. Coming after both indices witnessed extremely sharp corrections a few months ago, the rally has occurred when other emerging market indices have failed to recover their losses since the fall in February. The swift recovery, however, is not reflective of a secular rise. While the sharp market correction in February hit stocks across the board, this rally has been limited to a few pockets of the market. Heavyweight blue-chip stocks such as HDFC, Reliance Industries, ITC, Tata Consultancy Services and Infosys have contributed the most while many others have lagged behind. Almost half the companies in the Nifty still trade below their 200-day moving average, a sign of insufficient price strength.
The divergence in the performance of various stocks becomes clearer when large caps are compared to smaller companies. The mid-cap and the small-cap indices, which fell more sharply than the benchmark indices earlier this year, are still trading well below their historic highs in January. While the Sensex has gained almost 10% since the beginning of the year, the mid- and small-cap indices are significantly down. Not surprisingly, overall market capitalisation is still below its historic high reached in January. The present stock market rally clearly does not yet mark a return to the good old days when investors could expect multi-bagger returns by betting on stocks across the wider market. Several stocks in the mid- and small-cap category have fallen to levels reminiscent of a bear market. Investors are now probably seeking safety in a few large-cap stocks that offer better quality of earnings compared to untested and riskier smaller companies. The return of foreign institutional buying also suggests that investors may be betting on India over other emerging markets that have suffered more severely. It, however, remains to be seen if mid caps and small caps will follow the large caps and resume their journey upward. Else, the lack of sufficient breadth in the wider market will presage an eventual correction in the large caps too.
Published - July 28, 2018 12:02 am IST
