Even as voting for the parliamentary elections entered its third phase, the Sensex surged to yet another high on Thursday, ending the session at 22,715.33 points, putting on 13 points. Foreign investors continue to be bullish on the Indian market and have bought close to $5 billion worth of stocks since January. Meanwhile, domestic institutional investors have remained cautious, offloading shares worth $3 billion. Even small investors appear to be cashing out — mutual funds saw outflows from equity schemes in March.
While foreign funds initially loaded up on blue-chips and moved on to large-cap stocks, the rally has broadened considerably over the past week or so with mid-caps now catching up. The strong performance of mid-caps suggests more investors are now confident of a strong coalition at the Centre led by the Bharatiya Janata Party after the elections, driving up market activity to a two-month high. The average daily turnover in the cash market is at R18,391 crore, the highest since February 2012. The F&O segment too is seeing more action with daily turnovers averaging R1.65 lakh crore in April.
Since mid-February, after the opinion polls started to drive market sentiment, the 30-share Sensex has rallied 12.5% but the BSE Mid-cap index has gained as much 16.3%. As a result, the year-to-date return for the index is 9.3% compared with the 7.3% gain recorded by the Sensex. On Thursday, the BSE Mid-cap index rallied 0.6% to 7,331.28 points, its highest gain since January 2013.
The trend is in line with previous occasions where mid-caps gained more momentum ahead of the elections. Both in 2004 and in 2009, the Mid-cap index had outperformed the Sensex by an average 5% a month ahead of elections.
This time around, a month ahead of elections, the mid-cap index has rallied 6.8% while the benchmark Sensex has put on a more modest 3.9%.
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, the brokerage said while the jury is still out on the pace of economic recovery, the mid-cap rally is likely to extend further given that growth has bottomed out, currency has stabilised and the twin deficits have shown a marked improvement. These factors should be favourable for an economic recovery, which could be further bolstered by a decisive electoral outcome.
Gautam Chhaochharia, head of India