Market flies, but benchmark doesn't is cause of concern

The domestic equity market has seen two kinds of divergence in the last two years. In March 2015, when the Sensex hit a record high level of over 30,000, the market cap of all BSE-listed stocks was around Rs 105 lakh crore. Last week, the Sensex breached the 2015 record level only by 2%, but the market cap of all BSE stocks hit a record high of Rs 127.90 lakh crore - a rise of 22% over March 2015 levels. However, the share of the market cap of Sensex 30 companies in the total value of all the listed stocks fell to 40%, a record low level. This divergence between the market value of Sensex companies versus all BSE-listed stocks saw disproportionate gains in the mid-cap stocks in the last two years.

However, the reverse divergence between the market values of Sensex and the whole market values started last week. On May 17th, the Sensex hit 30,659 and the total market cap of all BSE-listed stocks stood at Rs 127.90 lakh crore. By yesterday, the Sensex fell mere 88 points (0.3%), but the market cap of all BSE-listed stocks fell by a whopping Rs 2.90 lakh crore in just 3 trading days to Rs 125 lakh crore.

Within two months, a cable stock has fallen 80% and a metal company crashed 43%. Investors in these two companies alone lost over Rs 3,000 crore of market caps in two months. There are many such examples of wealth evaporation in the midcap space despite the record level of benchmark indices.

On the domestic front, the monsoon is expected to arrive as per the schedule; fuel consumption has improved in the month of April; corporate results are better for the January-March quarter, and Goods and Services Tax is finally arriving and there is a lot of expectation that it would improve India’s gross domestic product growth. Hence, the benchmark indices like the Sensex and Nifty may remain firm in the short-term.

However, the reverse divergence (with the large cap segment remaining quite firm, and the mid and small cap segments falling a lot more), which started on May 18th, could last for a few more weeks. In the process, a lot more equity wealth from the overvalued stocks and companies with questionable governance issues may simply get evaporated in the mid and small cap space. The speed at which the broad market cap has fallen in the last three trading days is quite scary. Thus, it is still not too late to tilt (up to 50% to 70% of total portfolios, depending upon the risk profile) towards the large cap segment.

The writer is founder and managing director, Equinomics Research and Advisory