In last eight months, while Sensex has rallied nearly 19%, the BSE mid-cap index has gained as much as 34% and the small-cap index has yielded 40% returns. Although foreign institutional investors (FIIs) initially loaded up on the bluechip stocks and gradually extended their preference for large-caps, the market rally has now broadened with the mid-cap stocks arresting the fancy of the Street.
The strong performance by the mid-caps suggests that an increasing number of investors are now confident of a strong coalition at the Centre led by the BJP.
With increased hopes, the risk-on sentiment seems to have supported the gains in the mid-cap stocks with as many as 163 stocks or more than 71% of the mid-caps giving returns better than Sensex since September 13, 2013. About 20 of these companies have more than doubled with names like Voltas, Gujarat Pipavav, Apollo Tyres, Aurobindo Pharma and TVS Motor witnessing two to three-fold jumps.
The rising participation in the mid-cap space is reflected by an increased market activity with the average daily turnover in cash segment touching a 26-month high of Rs 17,912 crore in April. Even the number of stocks traded on BSE and NSE have seen a rise in the recent past from nearly 3,800 in August last year to over 4,600 stocks in last three months.
According to Deutshce Bank, mid-cap stocks tend to rally sharply when economic growth is expected to be at an inflection point. In a recent research note released in early April, the brokerage said that while the jury is still out on the pace of economic recovery, the mid-cap rally may extend given the growth has bottomed out, currency has stabilised and the twin deficits have shown a marked improvement.
Robust gains in the mid-caps notwithstanding, experts continue to take a cautious stance on the space given the decayed fundamentals of companies from cyclical or interest rate sensitive sectors like power, realty, construction and public sector banks.
Although they acknowledge that the mid-cap stocks witness higher momentum when the signs of economic recovery start emerging.
According to UBS, given that institutional ownership (FII and DII) of the small and mid-cap stocks has gone down in the March quarter, strong gains in these stocks imply that their performance may have been driven more by speculation rather than institutional buying.