The smaller stocks are running again.
The Bombay Stock Exchange (BSE) Small Cap index is up 55% from its value a year ago. The BSE Midcap index is up 56%, while the Sensex has gained 43% from a year-ago period.
It wasn’t so long ago that there was a lot of concern about market breadth and how the rise in the Sensex was on account of only a few stocks, but that is fast changing. Most of the rally in the smaller stocks has happened in the last couple of months.
For example, since 1 June, the Sensex has gained 4.5%, the BSE Midcap index 8.9% and the Smallcap index 10.3%. Ditto for the National Stock Exchange (NSE), where the midcap index has handsomely outperformed the Nifty since June.
Of course, it is not the index that investors are interested in, but individual stocks.
The trouble is that the index has a wide variety of stocks and the difference in their performance has been considerable. For instance, stocks such as South Indian Bank have appreciated by 52% in a month, while a stock such as Tata Elxsi Ltd is down 2% in the past month, and there are plenty of loss-making stocks.
One reason for the outperformance is the sectoral weighting in the index, with capital goods forming 15% of the BSE Small Cap index.
But there is little doubt that investors have had rich pickings among the small cap stocks—stocks in the BSE Small Cap index that have gone up over 50% in the past month include South Indian Bank,Kothari Products Ltd, Emkay Share & Stock Brokers Ltd, Ruby Mills Ltd, Empire Industries Ltd, Diamond Cables Ltd, Hindustan Dorr Oliver Ltd, Arihant Foundations & Housing Ltd, Asian Electronics Ltd and C&C Construction Ltd.
With valuations among the frontline stocks going up, investors have been looking down the value chain—while the Nifty has a price-earnings (P-E) ratio of 21.6, the NSE Midcap index has a P-E of 19.1.
Equity funds net inflows
Unlike foreign institutional investors (FII), mutual funds have been net sellers all through the current rally in the stock markets. Securities and Exchange Board of India data show that mutual funds have sold a net Rs833 crore worth of equities so far this month. That’s a miniscule amount, but it does show that mutual funds are not participating in the current market surge.
Nevertheless, data from the Association of Mutual Funds show that net inflows into equity funds are picking up. In June, net inflows into growth schemes amounted to Rs2,082 crore, more than the net inflows for the entire fiscal year.
In fact, June has been one of the strongest months for net inflows into growth funds so far in 2007—second only to March, when net inflows were higher at Rs2,354 crore.
But it is no indication that investors have suddenly become enamoured with equity funds—redemptions in existing schemes were higher than new sales and it was only the money collected through new schemes that saved the day. The trend of forcing sales through new issues continues unabated.
Rupee, RBI, auto stocks
The Reserve Bank of India’s (RBI) reversion to its policy of intervening in the foreign exchange markets to prop up the dollar seems to be paying dividends.
Since 1 June, the rupee has held its own against the currencies of its competitors.
It has gained by half a percentage point or so against the Chinese yuan, the Philippine peso, the Taiwan dollar and the Korean won.
The Brazilian real has appreciated 2.8% against the rupee, the South African rand 1.9% and the Thai baht a huge 6.4%.
It has, however, continued to depreciate against the Indonesian rupiah and the Malaysian ringgit.
Against the major currencies, it has appreciated by around 2% each against the British pound and the euro.
The flip side to keeping the rupee steady has been a rise in foreign exchange reserves of $6.5 billion (Rs26,325 crore) between 1 June and 6 July, call money rates of around 0.5% and a dip in the 10-year government bond yield to below 8%.
The stock market seems to believe that RBI’s attempt to defend the rupee will, sooner or later, lead to lower rates of interest, which in turn will boost the interest-rate sensitive sectors.
Auto stocks have already started moving up as a result.
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