Pre-election rally has more legs; stay cautious in small-caps: Apurva Sheth

The Sensex to SmallCap ratio is trading near its lowest levels since 2008. This means that smallcaps have outperformed relative to large-caps, Apurva Sheth said in this interview

With barely a month left for the results of the General Elections 2024 to be announced, APURVA SHETH, head of research at SAMCO Securities tells Tanmay Tiwary, in an email interview, that there may be more legs to the markets' rally. Edited excerpts:

How do you see markets playing out in the run up to elections?
 

Historically, the market has delivered an average gain of 14.3 per cent six months prior to general elections' results being announced. The S&P BSE Sensex, so far, has returned 8.4 per cent. Thus, with only one month remaining for results to be announced, we believe that markets can catch up with the average.

As for the Nifty50 index, it has closed positively in 7 out of the last 10 years in May. Over this period, the average gain for the month stands at 2.2 per cent. Thus, we believe that the Nifty50 may trade with a positive bias between 22,500 and 23,000 levels in the near-term.

How do you think markets will react to an unexpected rise in Congress' seats in the Lok Sabha elections?
 

The rise in the count of Congress' seats will not bother the markets much as long as the Bharatiya Janata Party (BJP) remains in power. On the contrary, one can expect a knee-jerk reaction from the markets if the count of BJP-led National Democratic Alliance (NDA)'s seats is slightly less than what is anticipated. However, the market should stabilise in a few days.

That said, only a major upset by the opposition parties can trigger a selloff in the markets, as it would put a question mark on the continuity of policies already set in motion by the current government. Until there is clarity on it, markets would trade with heavy volatility.

Do you believe the rally in small-caps may be sustained?
 

The Sensex to SmallCap ratio is trading near its lowest levels since 2008. This means that smallcaps have outperformed relative to largecaps. We believe that this outperformance may not last for too long. Valuations are not lucrative as the BSE SmallCap index is trading at 33.4, higher than its 1-year median price-to-earnings (PE) of 29.9. With several events lined up ahead, including general/Presidential elections in India/US, we would advise investors to stay away from smallcaps.  

What is your outlook on the Indian IT sector post the March quarter results?

IT stocks generally underperform in the first half of any calendar year, and their performance picks up in the latter half. So there is nothing unusual about their current price performance. The quarterly results announced by major IT players were below market expectations. The revenue guidance was also muted which added to the poor performance.

How has multiple indices' F&O expiries impacted the F&O market? How does this affect novice investors?
 

Daily expiries have certainly led to a four-fold jump in options trading volumes. However, this has also sucked in a lot of novice investors into believing that making money from zero-days-to-expiration (0DTE) options is easy. The reality is far from this.

More than 90 per cent of novice traders burn out in the first year itself. The 0DTE option has the potential to multiply your money within minutes but your capital can also become zero within minutes. Thus, it is important for novice traders to weigh the risks before tapping into the markets.