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Why Sensex, Nifty record rally may fizzle out soon

The Sensex and Nifty closed above 37,600 and 11,350 levels for the first time ever yesterday. The market has been rising for the last seven consecutive sessions amid optimism over strong Q1 earnings and FIIs reinstating faith in Indian securities in July.

Reliance Industries, HUL, ITC,TCS, Infosys and other index heavyweights on Dalal Street have announced earnings which beat analysts estimates and led to a record rise in Sensex and Nifty.

Foreign institutional investors (FIIs) which took out Rs 32,229.44 crore from Indian market from April to June withdrew just Rs 2,768.75 crore in July, lending support to the ongoing rally.

However, the meteoric rise in Sensex and Nifty has been inconspicuous this year. In fact, analysts and market participants said the buoyant sentiment is reflected only in 8-10 top stocks on the BSE.

The rally is a narrow one led by few large caps such as TCS, HDFC Bank, Reliance Industries, Infosys, ITC, Mahindra and Mahindra, Bharti Airtel and SBI among others.

Majority of these stocks rose after their Q1 earnings were announced which came above expectations.

However, to maintain the momentum of the rally, the indices would need participation from other large-cap and Sensex stocks. Even midcaps and small caps stocks which have seen correction since the beginning of this year would need to join the rally.

VK Vijayakumar, chief investment strategist at Geojit said, "When the Sensex and Nifty reached new records a few times recently, the popular response has been muted and subdued. Celebrations were conspicuous by their absence, because this rally, which took the benchmark indices to record highs, has been a very narrow rally led by a few large-caps - the HDFC twins, TCS, Infosys, Reliance and HUL which together accounts for 42.14 percent weightage in the Sensex and 36.84 percent weightage in the Nifty. Not only did the broader market not participate in the rally; worse, it has been moving in the opposite direction.

These trends in the market reflect gradual consolidation and 'reversion to mean' after the runaway rally in mid- and small-caps last year."

Support from the BSE midcap and small cap stocks indices which logged record rallies last year looks minimal since both are down 9.65% and 13.43%, respectively since the beginning of this year.

The contribution of the midcap and small cap indices in the build up to the current rally is minuscule when the role of large cap stocks comes into play.

The BSE large cap index rose 6.96% since the beginning of this year.

Surbhi Mittal, Research Analyst at Hem Securities said, "Sensex and Nifty are recording highs but individual indices still need to give positive indications to boost investor sentiments. Large caps like HDFC, Dabur, Reliance Industries have posted good results for the quarter ended on June 2018. In the year starting of 2018, as we saw BSE Mid Caps were trading at 18321.00 level and Sensex were at 35965. But now, BSE Mid Cap is trading at 16013.44 and BSE Sensex is trading at 37606.58.

Mid-caps and small-caps have just registered the correction and selling has begun. They play an important role in an investor's portfolio. Because of increase in market volatility, people are shifting to large-caps from mid-caps and small-caps."

However, the BSE midcap index rose 2.20% in the last one week and 4.40% in one month. Similarly, the BSE smallcap index gained just 2.30% in the last one week and 4.20% in one month.

In comparison, the large cap index rose 2.20% in the last one week and 6.50% in one month.

The recovery in the small caps and midcaps stocks seems to have started, above data suggest.

But investors would have to tread carefully when it comes to picking stocks during the current market phase since market is trading near all-time highs.

Deepak Jasani, head, retail research at HDFC securities said, "A large majority of midcap and smallcap funds have fallen less than their benchmark indices. Till elections are out of the way, the market will throw up a lot of opportunities to accumulate small/midcap and funds to generate outsized returns post the elections.

Investors would do well to reweight their equity portfolio among large, mid and small caps to the desired proportion as in a bull run, typically the proportion of midcaps would have gone up. The recent sharp fall in mid and small cap stocks has added to overall market volatility but has also expanded investment opportunities given steep valuation corrections in select stocks."

Written and edited by Aseem Thapliyal