While the Pulwama attack on February 14 and the ensuing tension between India and Pakistan did take its toll on the inflows by foreign portfolio investors, currency movement and benchmark Sensex movement at the BSE, there has been a divergence in broader market movement and the mid cap and small cap indices witnessed a break-out.
Even as the index for top 30 companies stood flat over the last 12 trading sessions, the mid cap and the small cap indices have risen 3.3 per cent and 4.8 per cent, respectively.
The rise in these two indices is despite a fall in Sensex and is in contrast to the trend seen over the last one year when the mid cap and the small cap indices have remained under pressure even as the benchmark Sensex did much better relatively.
While the Sensex gained almost 6 per cent in the calendar 2018, the mid and small cap indices lost 16 per cent and 25 per cent, respectively.
Even between December 31, 2018 and February 13, 2019, even as the Sensex stood flat, the mid and small cap indices fell 6.6 per cent and 7.5 per cent respectively.
Experts say that the government’s response post the Pulwama attacks has been taken positively by people and that has somewhat calmed anxiety around the election outcome which has led the investors to start taking positions in mid and small caps that have witnessed significant erosion in valuation over the last year or so. “A number factors are turning positive for Indian markets. While crude price is lower, inflation is under control and there is room for at least 50 basis point cut in rates by RBI this calendar (of which 25 basis point has already come).
Mid, small caps see major corrections in last year and half
If uncertainty around 2019 general election outcome was the biggest worry among investors, market participants feel that the government’s response to Pulwama attack has resonated positively among people and is likely to benefit them electorally. With some clarity on that front, investors are now willing to take investment positions and they are starting with better companies in the mid and small cap category as they have witnessed significant correction over the last year and half. As a result, even as Sensex has remained flat over the last 12-trading sessions, the mid and small cap indices have seen notable rise.
The general sense after governments response to Pulwama attack has also calmed some anxiety related to election outcome. With all the positives in sight, investors are taking position into mid and small cap companies as they have seen a significant correction,” said Pankaj Pandey, head of research at ICICIdirect.com. He further added that the income transfer scheme is also being taken positively and it is expected to improve both consumption and poll prospect for the ruling party.
Some feel that there are other factors too that may be playing on the minds of investors. While on the domestic front the earnings of companies remain intact, on the global front there is less likelihood of a hike in interest rates in the US. This provides hope that not only the fund outflows from Indian equity and debt markets will stop but there may be a steady flow of funds into the Indian markets going forward.
“Over the last 10-12 trading session the market breadth has been positive and it seems that the current rally is going to sustain for a longer time,” said Pandey. In the year 2018, foreign portfolio investors pulled out a net of Rs 33,553 crore from the Indian equities and pulled out a net of Rs 49,593 crore from the Indian debt market.
The support, however, was provided by domestic investors as the equity mutual funds alone witnessed a net inflow of Rs 1,12,242 crore between January and December 2018.