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Equity markets in India have been strong and have been rallying for more than 10 months now. Formation of a stable NDA government at the centre has provided further strength to markets. Mid and small caps have outperformed large caps in the current market rally. But now it seems that, the market trend is changing, especially after the budget.
You see, budget 2014-15 was a big event for the economy. After a thumping victory for BJP-led-NDA Government (in the 16th Lok Sabha elections), everyone eagerly waited for the first budget of NDA Government with Mr Narendra Modi as its Prime Minister. And when the budget was announcement, the absence of big bang reform announcements was noticed. Nevertheless, it didn’t play out very negatively on the markets.
Now it’s been a little over a fortnight the budget was announced and we have made some interesting observations.
You see, it is the large caps which have outperformed mid and small caps. During the period July 10, 2014 to July 25, 2014; while the CNX Midcap has generated negative returns of about -0.5%, the CNX Nifty has gained around +2.9%.
Midcaps getting expensive and losing momentum
Data as on July 25, 2014
(Source: ACE MF, NSE, PersonalFN Research) So, would mid and small caps cool off and large caps take the position of frontrunners as the market paves it path going forward?
Some Analysis…
Well, the rally in the mid and small cap domain started in September 2013, when they were trading at a deep discount as compared to large caps and Indian equity market started its ascending move. So, as the rally got stronger, mid and small caps got re-rated. This has been the primary reason for sharp outperformance of mid and small caps in the current rally. However after the run-up, the mid and small caps appear expensive. But, this is not to say that large caps are cheap. They are expensive too! Nevertheless, considering the margin of safety, now large caps appear safer than mid caps. Thus, if markets were to fall today, mid and small caps would plunge more as against large caps.
Here’s why…
Many of the mid and small cap stocks are from cyclical sectors. Investors have been hoping a stronger recovery in cyclical sectors such as auto, banking, capital Goods and industrial intermediates; to name a few. But the results have to justify their uptrend to outperform large caps.
Companies now have started announcing results for April-June quarter. As reported by Business Line, about 300 companies have so far declared results. Collectively their quarter-on-quarter performance has been dropping. Although revenues and net profits are rising, their pace has certainly reduced. Companies in the large cap domain have been reporting quarterly numbers which are much in line with expectations. In other words, there are more disappointments from the smaller companies as suggested by moderate revenue and profit growth reported collectively by the sample of 300 companies. This suggests that, the market may not hope any great performance from mid and smallcaps going forward.
So, should you invest in large caps now?
PersonalFN is of the view that, large caps be relatively stable as against mid and small caps. Therefore they too would not go up much nor would they violently fall if fundamentals justify their valuations.
Foreign Institutional Investors (FIIs) which have been the major buyers in the current rally, have now started going slow on Indian equities of late. Although net FII flows are still positive and look strong; the pace has reduced. Going forward, many sectors may see lower FII participation since almost 60% of total FII limit has been utilised so far. Likewise it is noteworthy that the Reserve Bank of India (RBI) has restricted FII participation in some bluechip stocks, which may limit the further buying of FIIs. Almost half of the constituents of CNX bank nifty may not see any incremental FII participation for now. In industrial sectors FIIs have already utilised around 2/3rd of their limit, leaving little room for incremental buying.
Economy may recover if the Government implements what has been envisaged. However, PersonalFN is of the view that, markets have already factored such positives. So during such times, margin of safety to take fresh exposure to mid and small cap oriented funds and to an extent large cap funds; seems narrowed as disappointments cannot be rule out.
PersonalFN believes it is a time to revisit your portfolio and asset allocation. Due to current market rally, if your equity exposure has increased to a great extent than what you planned for, it’s time to rebalance it and bring it down to initial level. Similarly, you should get rid of mutual funds which have rallied a lot but have a poor record in managing downside risk. Through various research reports and other personalised services, PersonalFN has helped several investors in their journey of wealth creation.
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