Broader markets race ahead in August, even as large-caps show fatigue

Retail buyers push Nifty Smallcap up 8% in August; mid-caps jump 6% against a 2% rise in large-caps

Even as large-caps are showing signs of fatigue after logging their best two-month performance in more than a decade, small- and mid-caps continue to charge ahead at a brisk pace. In August, so far, the Nifty Midcap 100 and the Nifty Smallcap 100 have gained 6 per cent and 8 per cent, respectively. The blue chip-focused Nifty is up only 2 per cent.

In the previous two calendar months, the Nifty had gained 16 per cent — its best two-month performance since March 2009. The gain for the Midcap 100 index had been in line with that for the Nifty. The Smallcap 100 had surged 25 per cent during the June-July period.

Earlier, the low valuation was the reason cited for buying in the broader market space. However, there, too, valuations have reached the expensive territory. “After the sharp rally, valuations have become expensive even for mid-cap companies. However, with major central banks keeping near-zero interest rates, equity valuations may remain elevated,” said  Jitendra Gohil, head of equity research, Credit Suisse Wealth Management India.

To underscore the buying frenzy in the broader markets, nearly 300 stocks have gained more than 25 per cent this month, and more than 40 of them have gained over 50 per cent each. Most of these stocks belong to the small-cap universe, where foreign portfolio investors (FPIs) and large mutual funds (MFs) usually abstain from investing because of sparse liquidity.

As a result, experts said gains in the small-cap universe could be fuelled by retail investors, who are not particularly known to place well-researched bets. “Vaccine hopes, the global market recovery, and the hype built around them have contributed to gains in the broader markets. But this is unlikely to sustain. The broader markets have entered dangerous territory. There is no liquidity from institutional investors. Much of the investment is coming from retail investors. And that cannot substitute institutional investment,” says G Chokkalingam, founder, Equinomics. 

Market players say the recent move by the stock exchanges to relax circuit filters have given small investors more ammunition. Earlier this month, the BSE had widened trading limits on 36 stocks, from 5 per cent to 20 per cent. Nearly 200 saw theirs going up from 10 per cent to 20 per cent.

In total, the exchanges have revised circuit limits on 645 stocks, of which only 10 have seen narrowing of limits.

According to experts, new investors coming into the markets are getting lured into investing in little-known companies, given their sharp gains. Since March, over 4 million demat accounts have been added. 

“There is no justification for the gains which some stocks have made. Many operators have got active and are trying to inflate prices to draw the interest of small investors. One should exercise caution. The party is good until it lasts. Once the tide turns, many investors may not be able to exit,” said an investment expert.