Mid-cap rally begins to sputter

Mumbai, July 31 | Updated: Aug 1 2005, 06:58am hrs
The current bull run in mid-cap and small-cap companies seems to be nearing an end. A majority of investors have renewed interest in frontline stocks which has pushed up indices to new peaks but the market breadth suggests a different story.

On an average, a total of 1,784 stocks lost ground last week while only 741 stocks actually gained. The decline in stock prices has been mostly in small-cap and mid-cap counters. In one week since July 22, on most trading days the market breadth remained negative, suggesting that the number of stocks that declined was more than the number that advanced.

Foreign institutional investors (FIIs), the driving force behind the current bull run, have returned their focus on frontline stocks, say analysts. And like lemmings, all other players are also chasing frontline stocks by liquidating investments in mid- and small-cap stocks.

Vineet Birla, equity analyst, Pranav Securities, said, The mid- and small-cap stocks have now started losing ground. The current valuations of most of these stocks are quite high. Also, with the Sensex on an upswing, investors are looking at opportunities to enter bluechips after booking profits in such stocks.

That valuations of mid-caps are overstretched can be gauged from the fact that the price to earning (P/E) ratio of mid-cap stocks has outperformed the benchmark Nifty by a wide margin and stood at 19.14 compared to Niftys 14.1 on July 29.

Analysts are also of the view that most of the mid-cap and small-cap stocks, that gained during the current bull run, have hit the roof and hence, at current levels, dont offer much scope for further growth.

This has prompted profit booking at higher levels. Last week, the Sensex gained nearly 3% or more than 200 points and even breached the 7,700-mark on Friday in intra-day trades before closing at 7,635.42. However, at the same time, both BSE Smallcap and BSE Midcap indices lost ground.

The BSE Smallcap index was the worst-hit, shedding 2.23% or 112.36 points since July 22. It closed at 4,920 on Friday. The BSE Midcap index lost less than 1% in the same period to close the week at 3,681. NSEs CNX Midcap 200 Index lost nearly 1%, between July 22 and 29.