Large-caps Soft While Mid-caps Shine As Markets Exhibit Diverging Trends

Indian stock markets are showing diverse trends between large- and mid-caps. Large-caps are exhibiting signs of stress while the mid-caps continue to show strength. The large-cap space is dominated by the foreign investors while the mid-caps are largely invested by the Indian domestic retail and HNI investors.

The BSE Sensex, the large-cap barometer of the market, declined 0.2 per cent losing 44 points in the last three months. The BSE Mid-cap index, in a similar time-frame, surged 22 per cent adding 2400 odd points to trade close to 13500 levels. Clearly, investors are taking a fancy to the mid-cap space.

If the last start of the rally was marked by a reversal in the large-cap space, the current continuation of the bullish sentiments is being dominated by the growth in mid-caps.

Foreign investor inflows took the Nifty to near 9000 levels touching 8968 on September 8, 2016. But a series of events such as the US elections and the expected US Fed rate hike is seeing foreign investors take profit outs pulling out Rs 3629.2 crore from Indian markets last week. In the short run, chances are this trend could continue.

The US economic growth posted its fastest rate of expansion of 2.9 per cent the September quarter. This firmly signals that the US Fed will raise rates. Hence, a surprise pickup in foreign investor inflow into the Indian markets can be ruled out.

On the domestic front, markets are racing ahead in the mid-cap space due to strong inflows. Last week domestic investors poured over Rs 3000 crore into the market. Lately, domestic investors stepped up buying purchasing Rs 1124.08 crore worth stocks the last full trading day. Additionally, direct purchases are not reflected in these numbers.

Individual investors are turning optimistic on select domestic stocks. Case in the point is Arvind, which surged 16.6 per cent last week. Private equity firm Multiples invested Rs 740 crore in the company’s retailing subsidiary Arvind Lifestyle valuing the company at around Rs 7,400 crore, while this company is targeting a growth of 25 per cent to Rs 9,000 crore by 2022.

Stocks like Hindustan Media Ventures, Rajoo Engineers, among others are also exhibiting bullish trends, and they are largely in the mid-cap space.

However, the broader trend is that of divergence between large- and mid-cap stocks. As foreign investors are pulling out gains the pressure is clearly there on large-caps. Gains here look capped in the short run with the possibility of a downward bias emerging in these counters.

On the flip side, select mid-cap stocks could clock faster returns as domestic investors continue to pour money into the markets.

The challenge now is whether Indian investors will continue to invest. Market experts point out that it’s the recent gains that is the lure attracting investors. And not normal fundamental reasons that should drive investors to invest in the markets. Hence, such investors could just as easily take a flight out of the markets if there is a trend reversal.