The 19.08% rise of the Sensex, the benchmark index of the Bombay Stock Exchange (BSE), over the last three weeks has been indicative of a foreign investment-led rally where the largest stocks have done the best and mid-cap and small-cap stocks have followed.
While the Sensex, which comprises 30 stocks with the largest market capitalization, has gone up 19.08% since 18 September, the BSE’s mid-cap index went up 7.15% and the small-cap index went up 2.75%.
Within the Sensex, the top 10 companies, according to market capitalization, rose 20.95%, since 18 September.
The current rally, where the Sensex rose more than 2,000 points in just 14 sessions, was led by foreign investors investing in global equities and emerging markets after theUS Federal Reserve cutinterest rates.
“If you see where the buying power is coming from, you will know why it has come in frontline, liquid stocks,” the equities head of a domestic brokerage, who did not want to be named, said.
While foreign institutional investors have invested more than $5 billion (Rs19,700 crore) in the market, domestic mutual funds have been net sellers to the tune of around Rs1,800 crore, for the month ended 4 October, according to data from the Securities and Exchange Board of India.
Even on Wednesday, when the Sensex closed at 18,658.25 points—up 2.07%, the mid-cap index rose 1.16% and the small-cap index rose 0.5%.
“If you see the rally from 15,550 to now, it is clear that new foreign funds have come in and these funds usually invest in large caps because they are more liquid and it is easier to exit,” said Ketan Karani, head of research atKotak Securities Ltd, a Mumbai based brokerage.
Analysts expect that as the gap between large-cap and mid-cap stocks widen, mid- caps are bound to become more attractive to investors.
“This rally has been led by large-caps because the most of the money from long-only foreign investors has come into large-cap stocks only,” saidA. Subramanian, chief investment officer of Birla Sun Life Asset Management Co. Ltd. “As a result of this, the valuation of mid-cap stocks has become attractive since they haven’t gone up as much as the large caps. The second quarter results could be the trigger for a rally in the mid-cap space.”
If this rally in large caps continues then valuation gap between large-caps and mid-caps will increase, said Samir Rachh, portfolio manager at Emkay Share and Stock Brokers Ltd. “And after a point, mid caps are likely to catch up” he said.