Money managers and heads of research at brokerages believe these shares may weaken further as these segments are still expensive even after the sharp fall.
Mumbai: The Wall Street adage — ‘sell in May and go away’ — is proving to be true for the Indian stock market, particularly for mid and smallcaps which are witnessing their biggest rout after six years. Mid and smallcap indices have fallen 8 per cent so far in May and down 12 per cent since January as worries about the country's worsening macro readings in the wake of rising oil prices and falling rupee prompt investors to dump the best performers of the bull run that started in August 2013.
At this rate, both BSE MidCap and SmallCap indices are on track to mark their worst May performance in 12 years. The weak market breadth can be gauged from the fact that 367 of the top companies by market capitalisation are down more than 30 per cent from their 52-week highs posted earlier this year while another 240 stocks are down 20-30 per cent from their peaks in the past one year. About 261 stocks are down 10-20 per cent from their 52-week high levels, data compiled by ETIG database showed.
“The market breadth has been bad for the last couple of weeks and we are now entering the fourth week of decline. Almost every day 1,600-1,900 stocks are declining. This is a negative sign for the market,” said Rohit Shrivastava, fund manager at BNP Paribas-owned Sharekhan.
In comparison, the Sensex has fallen 1.5 per cent so far this month. Brokers said in last couple of months investors have been shifting their money from midcap and smallcap stocks to select bluechips on the Sensex and Nifty. The flight to relative safety has been accentuated by worries about the effect of falling rupee and firm crude prices on the government’s finances.
Strong domestic flows from individual investors into mutual fund and PMS schemes were the biggest drivers of these shares, which moved from strength to strength despite share valuations flashing a sell signal last year. Portfolio Management Services, or PMS firms, which have been the biggest buyers of these smaller shares in the last two years, have been forced to dump them because of redemption pressures. Fresh lumpsum flows into equity mutual fund schemes have dried up; in fact some are being pulled out. Reclassification of mutual fund portfolios, as mandated by Sebi, which also resulted in exit from various mid and smallcap stocks also contributed to their recent weakness.
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Money managers and heads of research at brokerages believe these shares may weaken further as these segments are still expensive even after the sharp fall. According to Bloomberg data, the BSE Midcap index is trading at a trailing price to earnings ratio of 45.7 times against a five-year average of 28.4 and an all-time peak PE of 55.3 times (hit on January 8 this year). The SmallCap index PE is at 84.75 times.
Despite the sharper fall, these indices are trading at a premium to large caps. The BSE Sensex is trading at 23.5 time on a 12-month trailing basis.
“Midcaps are expensive both on absolute basis and relative to large caps. Macro is turning worse which is leading to a sentimental impact. We have selectively seen impact of rising commodity prices on margins of companies. Domestic flows are also not as strong as last year,” said Gautam Chhaochharia, head of research at UBS.
“As an asset class, we are still under-weight on midcaps,” said Chhaochharia.
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From the all-time high of 20,183.45 (hit on January 15), the BSE SmallCap index is down 16 per cent. The BSE Midcap index is down 14.7 per cent from its record high of 18,321.37.
Some analysts are advising investors using this opportunity to put money in stocks that are not impacted by the macro concerns.
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“Investors should focus on domestic consumption and midcap IT companies which are less sensitive to the changing macro environment,” said Abhimanyu Sofat, head of research at IIFL.
