The Sensex, which closed Thursday at 12274.27, its highest since May 17, 2006, is just 338 points short of its all-time closing high of 12612.38 on May 10, 2006.
Analysts say large caps are near their fair values
MUMBAI: The Sensex, which closed Thursday at 12274.27, its highest since May 17, 2006, is just 338 points short of its all-time closing high of 12612.38 on May 10, 2006.
But this rally, since it has been too narrow, may take a turn in the days ahead. Two-third of the Sensex’s 30 stocks still trade below their May 10, 2006 prices. On a broader scale, 87% of the 2,455 actively traded stocks on the Bombay Stock Exchange (BSE) still quote below their May 10, 2006 prices. This could mean that those which ran up are red hot, and those which did not, have the steam to.
“The large caps are near their fair values and the situation may change dramatically. For sure, the mid caps could play a catch-up game. There is value in select mid-cap stocks and it only needs to be backed up by liquidity. The crash in May had shaken the confidence of investors and they have decided to play it safe in large-cap stocks.” said Manish Sonthalia, equity strategy vice-president of Mothilal Oswal. But Sonthalia advises to be cautious on investments in mid caps, since these counters could face a liquidity dry-up on the event of a fall.
There were more reasons to the stand investors took after the May crash — crude prices hit an all-time peak, interest rates rose globally and commodity prices shot up as geopolitical tensions intensified. But of late, these concerns have cooled off.
“The risk premium investors used to pay for mid-cap stocks has been flowing into large caps since there were many concerns like crude prices, rate hikes and other global inconsistencies. But even when rates were hardening, Indian companies have succeeded in reducing their debt-equity ratio on a continous basis,” said a fund manager with a domestic fund house.
“There is still a gap between the current Sensex level and its previous high. There will be a noticeable difference when the Sensex covers up ground. There is more room left in the mid caps than in large caps. Also, the overall profit growth for mid-sized companies is expected to be robust, minus a few exceptions,” said Anand Shah, fund manager of Kotak Mutual Fund.
Another reason for the sluggishness in mid- and small-cap stocks was the lack of retail participation. But the volume growth in recent times is quite indicative of the fact that retail participation in the market is on the rise. The average combined turnover of the BSE and the NSE has risen from Rs 8,813 crore in August to Rs 10,135 crore in the current month till date.
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