Drastic change in Indian markets? Mid caps galloping, Sensex just trotting along; What this means for investors

Updated: March 12, 2019 2:34:08 PM

Something drastically different is happening in our stock markets that has not been seen over four years.

stock market, share market, stock market investment, Sensex, Nifty, large caps, small caps, NSE Small cap Index Stock Market Investment: From the bottom of an 8 session slide that ended on 19th February, the Nifty is up 4.3%, and the NSE Small cap Index is up by 12.92%.

Something drastically different is happening in our stock markets that has not been seen over four years. The Mid Caps and the Small Caps are galloping while the Sensex is just trotting along.

It’s a classic case of the Tail Wagging The Dog.

From the bottom of an 8 session slide that ended on 19th February, the Nifty is up 4.3%, and the NSE Small cap Index is up by 12.92%. The smaller stocks exhibit this frenzied behaviour either at the time when they begin participating in the rally or at the fag end of a rally, which is usually near the top. While the Nifty made a new high in August 2018, the Small Cap Index did not make a new high with the Nifty. So it is not the top.

There is frenzied buying in the smaller stocks as these have seen the deepest decline last year. Mutual Fund re-classification was behind the massacre in the smaller stocks as all funds flushed out excess small caps, simultaneously from their portfolios. Now these are merely playing catch up. Also, this rally is different than all the past rallies we have had since January 2018. In this rally both the small caps and large caps are participating. In fact, the small investor is seeing some appreciation in his portfolio after a long time.

What has changed?

Investors ask, what is the fundamental change that has happened in the past three weeks that the markets have gone crazy?

A lot has happened in the sub-continent and the world that shows India in a stronger position than ever. Consider this. Sushma Swaraj, External Affairs Minister, addressed the inaugural session of the 46th Organization of Islamic Cooperation (OIC) meeting of the Council of Foreign Ministers on March 1, 2019, in Abu Dhabi as a “Guest of Honour.” An honour never bestowed on India so far.

To put the matter in perspective, India was invited to participate in the first OIC at Rabat in 1969, but Mr Fakhruddin Ali Ahmed could not address the conference due to objections by the then Pakistani President Yahya Khan. Exactly 50 years later, Pakistan objected again, but the hosts did not rescind their invitation to India and accepted a Pakistani ministerial boycott as a price worth paying for the benefit of engaging India.

Coming after the Pulwama terror incident, this was India playing on the front foot in international diplomacy. On February 22 the UN Security Council condemned Pulwama attack, with China backing India for the first time in such terror matters. The surgical air strike, downing of an F-16, Wing Commander’s arrest and subsequent unconditional release have created a sense of patriotism across the nation, which could manifest itself in a decisive mandate in the forthcoming elections. That uncertainty has now been laid to rest and the markets are celebrating that.

Isn’t The Economy slowing?

Yes, the global economy is slowing. The IMF has lowered its estimate of world GDP growth to 3.5% in 2019 and 3.6% in 2020 from 3.7% in 2018. We will also grow slower at 7% in FY 19 as compared to 7.2% in 2018, but growth is likely to pick up significantly in 2020. We are the world’s fastest growing economy among the larger ones and will continue to be the fastest. Our relative performance will continue to be better.

What about trade wars

Trade wars or talks, as you may like to call them, are an ongoing phenomenon. It’s a continuous evolving situation. China and the US are talking. They should soon arrive at an amicable solution. EU, UK and US will keep negotiating with each other trade matters. The process continues. It’s a part of the everyday business life. Markets will discount all these in due course.

A silver Lining

As the world adjusts to its slower growth, demand for oil will also take a hit. So crude oil should not be an issue in the immediate future. Also helping matters is the fact that Libya has resumed production at its largest facility- Al Sharara oil field, which alone should add something like 0.3 million barrels of oil per day.

Aren’t the FIIs net sellers

Yes, they were net sellers in 2018 and also in January 2019, but have become net buyers since February. They are net buyers of Rs 16,000 crore as of date for this CY. Besides, waning election uncertainty will further motivate FIIs to put in more money into India. The long-term institutional money by pension funds continues to come in.

Where are we headed?

Investors both small and large are back in the arena. The FIIs have turned buyers. The earnings are round the corner, which will grow. Private weather specialists have forecast a normal monsoon this year. And last but not the least, we have begun the current series with the lowest Open Interest in Stock Futures in 22 months.

The Nifty Express has just chugged in. Board it for a comfortable and safe journey.

(By VK Sharma, Head PCG & Capital Markets Strategy, HDFC Securities)

(Disclaimer: These are the views of the author. Please consult your financial advisor before making any investment)

For latest coverage on Maharashtra Assembly Election 2019 and Haryana Assembly Election 2019, log on to financialexpress.com. We bring you full coverage of Assembly Election 2019 on Financial Express, stay tuned for latest election updates.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.