Eight to 10 heavyweight companies remained the least affected. Their continuous market share gains, while maintaining profitability, led to the outperformance

AJIT MISHRA, VP- RESEARCH, RELIGARE BROKING

The BSE Midcap index is currently valued at 27 times its underlying earnings in the trailing 12 months, a sharp decline from the price-to- earnings multiple of 35 times a year ago. In comparison, the benchmark Sensex is trading at 27.3 times its trailing earnings. This is the first time in over two years that the midcap index is trading at a discount to the benchmark indices that represent large- cap stocks.

Put simply, mid- caps are much cheaper than large- cap stocks in the current market. “The overall economic slowdown is visible in the mid- cap and small- cap spaces. Corporate earnings here are not showing encouraging growth. Only select large- cap stocks are performing and those are the ones where earnings growth is visible,” says Siddharth Sedani, Vice President-Equity Advisory, Anand Rathi Shares and Stock Brokers.

U.R. Bhat, Fund Manager, Dalton Capital Advisors, says prices of small- and mid- caps are not as well equipped as large- caps to face any adversity in the economy. “So, they are quoting at a discount now after falling from peaks.”

Rational Exuberance

Another factor lending buoyancy to the stock markets is the ebbing trade tensions between the US and China. Globally, there is optimism that the first phase of the trade pact will be signed between the US and China, which may lead to rollback of tariffs announced earlier.

“This, coupled with signs of some green shoots emerging in the global economy drove capital flows into emerging market equities, including India. Despite India’s weakening macro economy, buying interest in Indian stocks was largely fuelled by hopes of further reforms by the government,” says Jitendra Gohil, Head India Equity Research, Credit Suisse Wealth Management, India.

IDFC Securities’ Sinha says with both China and the US agreeing to scale down their stringent positions, the market sentiment has got a boost. “Also, indicators like auto sales and global trade numbers have shown that on a sequentially adjusted basis, there is an improvement along with bottoming out of stress.”

It’s not surprising that retail investors continue to be pulled towards equities as an asset class. According to data from the Association of Mutual Funds in India (Amfi), the assets under management, for the first time ever, touched the ` 3 lakh crore-mark in October.

Even foreign portfolio investors or FPIs have been net buyers of Indian equities since September 2019, when the government announced tax cuts for companies. In October, their net inflows were ` 3,800 crore, while in the first week of November, they infused a net of ` 6,434 crore in equities in a boost to market sentiment.

“In the last four weeks ( between mid- October and midNovember), the Nifty has risen 4.7 per cent, driven by net buying from FPIs, who have been net buyers. Hopes of more market-friendly announcements by the government and global risk- on sentiments have been fuelling the Indian equity markets,” says Gohil.

No other asset class in India is at present delivering returns on the lines of the stock market, says Chokkalingam. “Real estate has been reeling under a slowdown, with some investors exiting the market even at a loss. Gold has lost its sheen. And that leaves investors with little option other than equity markets,” he says.

But investors need to exercise caution while investing as all stocks are unlikely to provide good returns even though the broader indices are rising