Companies, which are trading significantly below this long-term average level, are mainly the debt-laden ones or those whose corporate governance practices have come under question of late.
India’s stock benchmarks are just 6 per cent below their life-time highs but the picture beneath the relatively rosy surface is grim. The sharp selloff in mid- and smallcap shares in recent weeks has resulted in almost 63 per cent of the BSE-500 index constituents trading below their 200-day moving average — a key sentiment indicator. When an index or a stock closes below the 200-DMA, it is said to be in a long-term downtrend and vice-versa.
Growing uneasiness among market participants over the slowing economy, a battered non-banking finance sector and repercussion of additional surcharge on foreign investors’ stock market profits here have deepened the slump in mid-cap and smallcap shares. Out of the stocks on the BSE-500 index, 315 are trading below their 200-day moving average.
Companies, which are trading significantly below this long-term average level, are mainly the debt-laden ones or those whose corporate governance practices have come under question of late.
Jet Airways, which closed at Rs 43.35 on Friday, is nearly 79 per cent below its 200-DMA. Several companies belonging to the Anil Ambani-led Reliance Group are trading at 71-78 per cent below this long-term average.
“As the economy slows, small and midcap companies are going to be under more pressure. Their profits are probably going to fall quicker than the large-caps,” said Andrew Holland, CEO, Avendus Capital-Alternate Strategies. The BSE midcap index is 23 per cent off the all-time high of 18321.37 seen on January 9, 2018. The BSE SmallCap index is 34 per cent away from an all-time high of 20183.45 seen on January 15, 2018. Both the indices are close to 52-week lows achieved in February 2019.
The smaller shares have underperformed the main indices — Sensex and Nifty, which rallied 10 per cent in April-May on optimism over BJP’s electoral victory. The momentum faltered as market economic realities came into sharper focus post national polls.
Budget proposals to raise taxes on the super rich and foreign investors and the proposal to raise minimum public shareholding limit have further soured sentiment. The lack of a stimulus to kick-start the rural economy was another dampener besides continued worries over US-China trade war.
“Returns from India have been around 3 per cent in dollar terms in the last three-four years. The PE is higher than other emerging markets; economy is slowing and foreign investors are getting taxed higher,” said Holland. “The capital gains tax was done for everybody but then to have differential tax now doesn't make sense,” he added.
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Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities said the top ten stocks are driving the market.
“Between January 2018 and June 2019 India's market cap was up by 12 per cent but if top 10 stocks are removed the market cap is down 3 per cent," said Radke. Experts said that selling in large caps could intensify going forward if the global and local concerns continue to weigh down sentiment.
