Markets welcome 2018 with a smart rally; BSE SmallCap up 3.5% so far

Mid- and small-cap stocks outperform Sensex and Nifty; experts say outlook positive

The first seven trading sessions of 2018 saw 296 stocks from the broad-based BSE 500 index gain more than the Sensex, which was up 1.1 per cent.

Even as the benchmark indices make new highs, the party on Dalal Street is going strong in the mid- and small-cap stocks. Of the BSE 500 shares, 139 have posted gains of over five per cent.

Several themes have caught the market’s fancy. Sanjiv Goenka group’s Phillips Carbon Black was the best performer in the BSE 500 index in the first seven trading sessions of 2018, with its shares rallying a whopping 48.8 per cent. Brokerages have been eager to give ‘buy’ calls on this carbon black manufacturer, used in tyres. With robust automobile demand along with supply constraints from Chinese producers, the stock has rallied.

The Sensex, too, had a star performer in Coal India, which has rallied 15.6 per cent as the public sector giant raised coal prices. In other Sensex stocks, YES Bank, Larsen & Toubro, Tata Steel, and Tata Motors gained between five and eight per cent.

Chemicals and speciality chemicals continued their rally even in 2018 as pollution controls in China along with improving domestic demand helped Indian players. Himadri Speciality Chemical, Sudarshan Chemical, and Deepak Nitrite were some of the leading gainers.

Rain Industries, which makes cement, carbon, and chemicals, saw its shares gain 23.8 per cent during 2018, becoming the second-best performer in the 

BSE 500 list.

Hotel stocks Indian Hotels Company and EIH, too, have been on an uptick on higher average room rates and occupancy in the December quarter. 

Both Sensex and Nifty are up over one per cent each in the first seven trading sessions of the year. The broader market continued to outperform the benchmarks, with the BSE MidCap index gaining two per cent and the BSE SmallCap index up 3.5 per cent in 2018 so far.

Market participants expect this momentum to continue in the near- to medium-term as portfolio flows continue to remain strong and macroeconomic indicators show signs of recovery.

Major brokerages have already indicated a positive year ahead for Indian equities on account of revival in the domestic economy, corporate earnings recovery, and buoyancy in global equities.

They are quick to put in a caveat that the rise in prices will be lower than last year though.

Analysts say the 30 per cent gains made by the benchmark indices during 2017 were largely on account of the gush of liquidity from institutional investors, including domestic mutual funds rather than improvement in fundamentals.

While the flows are expected to continue even in 2018, the quantum may be smaller, experts added.

“Most of the market performance in 2017 was led by a valuation re-rating rather than earnings revisions. This re-rating reflected a lower risk premium and improved long-term growth expectations rather than lower interest rates, though our investor discussions suggest the latter was a key narrative from their perspective. Flows can remain supportive of markets in 2018, though arguably less so than in 2017,” said Gautam Chhaochharia, head of India research, UBS Securities.

Analysts are now predicting a turnaround in corporate earnings cycle during 2018. Earnings growth had remained subdued in the last few years on account of several disruptions on the policy front.

According to Jitendra Gohil, head of India equity research, Credit Suisse Wealth Management, the consensus earnings per share (EPS) of Nifty was continuously revised downwards in the past three years, owing to disruptions caused by the Reserve Bank of India asset quality review, demonetisation, and the implementation of the goods and services tax. “We do not expect further downgrades to March 2018 consensus EPS. Even after assuming some earnings cut, if EPS settles to mid-teen levels, it will still be one of the best EPS growth years for Indian equities,” Gohil added.

Foreign portfolio investors purchased shares worth Rs 21.2 billion in 2018 so far, while domestic institutions sold shares worth Rs 6.2 billion, data compiled from stock exchanges showed.