NEW HIGH: SENSEX CLOSES ABOVE 41,000 FOR THE FIRST-TIME EVER

SMALLER STOCKS OUTPERFORMED THE BENCHMARK INDICES, ALTHOUGH THE BROADER MARKETS SURGED TO RECORD HIGHS

MUMBAI: Small and mid-cap shares rose on Wednesday as investors snapped up beatendown stocks, broadening the current market rally that has seen benchmark indices climb to record highs in November.

Smaller stocks outperformed the benchmark indices, although the broader markets continued their climb, closing at record highs. The BSE MidCap index rose nearly 1% on Wednesday, compared to the 0.49% gain in the benchmark BSE Sensex, which closed at a life-time high of 41020.61. Year to date, the BSE MidCap index has declined 3.39% and the BSE SmallCap has plunged 8.63%, while the Sensex has gained more than 13%.

Investors are turning to smaller stocks as they offer a better risk-reward, with valuation discount of mid-caps versus large-caps at close to a 10-year high, according to analysts at Citi Research. Investors also appear to be betting on a rebound in the economy, although macroeconomic data suggests otherwise.

With factory output in the September quarter contracting 0.4%, economic growth is likely to slow down further to less than 5% in the quarter, data for which is to be released on Friday. “The markets are cheerful, hoping that the government will consider a new scrappage policy. Rate-sensitive stocks such as banks did well on expectations of a rate cut in the RBI monetary policy. Investors are expecting more measures from the government to support growth,” said Vinod Nair, head of research at Geojit Financial Serlooked vices.

The valuation discount seen in mid-caps highlights the improved risk-reward and low expectations, according to analysts at Citi. “Interestingly, this compares to highest premium to large-caps in 2017—so in two years, mid-cap sentiment seems to have gone from extreme optimism to huge pessimism,” they said in a November 25 note.

One of the reasons to buy mid/ small-caps is the high return potential, they said. “We have

at the last 10 years’ performance to see what the odds are and no surprises, it remains tough to call those multibaggers—only 2% of small-caps become large-caps, while 20% no longer exist,” said the analysts.

Meanwhile, foreign brokerages such as BNP Paribas are overweight on India. “We note that our December 2019 Sensex target of 40,500 does not suggest any headline index upside with index valuations above historical levels. About 17-18 Nifty stocks trade at a premium to their historical five-year averages on a one-year forward price-to-book and price to earnings ratio versus 10-14 stocks about two months ago. Thus, the stock rally has broadened with the BSE MidCap index valuation back to near its historical average,” BNP Paribas said in a note on 25 November.