Small, midcaps yet to catch up with Sensex

The recovery in the stock market from the March 9 lows has not been uniform. It has been dominated by the large-cap stocks, while the smaller peers have not had a great time. While the Sensex has recovered 69.40% of its losses between January 8, 2008 and March 9, 2009, the bounce-back in the midcap and smallcap indices has at 55.01% and 46.51%, respectively.

The Sensex fell 12712.93 points from its high of 20873.33 (on January 8, 2008) to  8160.40 (March 9, 2009). Since then, it has gained 8822.74 points (69.40% of the fall) to close at 16983.14 on Monday. In comparison, the midcap index fell 7263.58 points to 2553.49, but has gained only 3995.44 points since then. Similarly, the small-cap index recovered 4953.18 points of the 10649.45 points it lost between January 8, 2008 and March 9, 2009.

Market watchers attribute this to buying in index stocks by foreign institutional investors (FIIs) and the general lack of confidence in the markets.

“There has been a lot of index buying by ETFs (exchange traded funds). Institutional fund flows have also been directed to blue-chips, which has resulted in more of a recovery in those scrips,” said Sandeep Nanda, CIO at Bharti Axa Life Insurance.

ETFs are passive investment vehicles that track indices such as the Sensex. Flows would thus be restricted to the constituents of the index. FII inflows since March 9, 2009, have been Rs 87,725 crore, according to data from the Securities and Exchange Board of India.

Others attribute it to a lack of confidence about the recovery. Investors are playing it safe and investing in blue-chips, that tend to be more stable, marketmen said.

“This can be seen as a measure of the confidence in the recovery. People are still talking of a double-dip and the sentiment cannot be said to have reached the same bullish pitch as earlier,” said a market watcher who preferred to remain anonymous as he is not allowed to speak to the media.

Some of these fears came to the fore with the news of the recent Dubai debt crises. When it was learned that Dubai World was deferring payments on a $59 billion loan on November 26, global markets including India went into a tailspin. However, the fall in largecap stocks was a lot less than in smaller ones.

The Sensex recovered to close 222.92 points down, after having fallen 644.49 (3.82%) in intraday trade. The mid-cap and small indices underperformed the markets on the day, falling in excess of 4% on an intraday basis. But market experts say valuations might now be favouring stocks outside of the blue-chip universe.

“The broader markets are trading on the higher side of the range, which we see at 4800 to 5200. We will see stock-specific action in the days ahead. We prefer select midcaps as large-caps are trading at higher valuations,” said Siddharth Bhamre, head, investment advisory and derivatives, Angel Broking.

The Sensex is trading at a one-year trailing price to earnings ratio of 21.60. The midcap index is at a P/E of 19.29 while the smallcap index trades at 17.46.