Mid, small-caps outrun Sensex

BSE SmallCap index gained 12%, while MidCap rose 10%, against 6% upmove in the benchmark index in H1 of FY18

The shares of mid- and small-cap companies have fared well compared with their large-cap peers in the first half (April-September) of this financial year. The S&P BSE SmallCap index rallied 12 per cent, while the S&P BSE MidCap index rose 10 per cent, against a six per cent upmove in the benchmark BSE Sensex.

Around 18 stocks from the S&P BSE SmallCap index appreciated over 100 per cent in the past six months, while 69 rallied between 50 per cent and 99 per cent. The list includes Indiabulls Real Estate, Indiabulls Ventures, HEG, Graphite India, Avanti Feeds, Adani Transmission, Future Consumer and Tinplate Company. Only Future Retail, Avenue Supermarts (D-Mart) and Bajaj Finance from the large-cap pack rallied more than 50 per cent during the reporting period.

Strong inflows by domestic mutual funds (MFs) and improved financial performance led to the rally, according to analysts. MFs have pumped in a net amount of ~70,460 crore in equities in the first half of FY18 — five-times higher over the year-ago period.

“Mid- and small-caps have benefited from the gush of liquidity flowing into the markets, both from domestic and foreign players. That apart, there was an expectation that there would be a formalisation of economy after demonetisation and the implementation of the goods and services tax (GST), which in turn would augur well for these two segments,” said Vinay Khattar, associate director and head of research at Edelweiss. Outlook Analysts said factors such as geopolitical events (the escalating tension between the US and North Korea), global central bank policies, oil prices, impact of the GST on corporate earnings, performance of the rupee and measures to rev up economic growth would dictate the market trend.

Gautam Chhaochharia, head of India research at UBS Securities, in a report coauthored with Sanjena Dadawala, said the risk-reward for the Indian markets remained unattractive and that the markets are pricing in too much (economic) growth too soon. Their base-case for the Nifty50 index by the end of December 2017 is 9,000 (down nearly eight per cent from the current levels), while the upside scenario is 10,000.

“The market is again pricing in too much growth too soon in hopes of a demand recovery in the second half of the year. Consumers may be in the same boat as markets. The sentiment is improving, but the actual underlying trends are not. In our view, the risk-reward for Indian markets remains unattractive,” they said.

On the domestic front, the government has been under pressure to revive the economy, following a surprisingly weak gross domestic product (GDP) growth of 5.7 per cent year-onyear in the June quarter, below 6.1 per cent in the previous quarter and 7.9 per cent a year ago.

In September, the rupee hit its lowest level in five months, slipping below the 65-mark to the US dollar amid concerns that the fiscal deficit would widen after the government said it was considering measures to boost growth. A key thing to watch is the quality of government spending or expenditure mix (investment vs consumption), according to analysts.

“If the spending is geared towards boosting investment or enhancing competitiveness then it will likely have more durable long-term positive impact and help mitigate concerns about India's long-term fiscal sustainability,” says an HSBC note.

Consumer discretionary, financials, industrials and materials are the key overweight sectors for HSBC, while information technology, consumer staples, telecom, health care and energy are among its key underweights.