Trust bulls to stay in hunt for small-caps

Bulls may continue to favour mid- and small-cap stocks over frontline peers this week as investors remain uncertain about the direction in which the benchmark indices are headed.

While analysts, tracking company fundamentals, feel that a correction is overdue as valuations appear stretched, technical analysts are of the opinion that indices may strengthen further later this week.

“If the Nifty manages to stay range-bound in the first half of the week, then it may rise to 6250-6500-levels as short-term indicators would point to an oversold situation,” says Geojit Financial Services’ head of technical and derivatives research Alex Mathews. He is bullish on Reliance Industries and Cairn Energy this week.

While the ongoing rally in the mid- and small-cap segments can be attributed to their lower valuations compared to frontline stocks, there is some discomfort in the way these stocks are rising.

“The price movements and volumes seen in some most illiquid stocks and some most liquid stocks are certainly not a good sign. This kind of movement is generally seen around the peak of a bull rally. Investors may control the temptation to make some fast bucks and stay clear of low-quality stocks, promising stupendous returns in the short term,” says Merrill Lynch’s equity strategist Vijay Gaba in a note to clients.

In the week to December 14, BSE’s small-cap index has gained 7.5% and mid-cap index has risen close to 5% from last week. “While we wait for Q3 results and more visibility on FII inflows, large-cap stocks might take a breather,” Mr Gaba says. Foreign institutions prefer to invest in frontline shares or at the most larger mid-caps due to higher liquidity and on perception that these companies follow better corporate governance standards.

Foreign institutional investors (FIIs) have net sold Indian stocks worth Rs 1,434 crore in the past three sessions, according to provisional data on NSE since the US Federal Reserve cut the benchmark rate on Tuesday. So far this year, FIIs have net bought Indian stocks worth Rs 70,421, according to SEBI data.

Though the selling has been partly offset by domestic institutional buying, analysts feel the stance by FIIs in the past three sessions is not very encouraging as the Fed rate cut, though below expectations, should have ideally sparked some fresh inflows.

Analysts warn that if outflows continue, domestic investors may also start selling. In the US on Friday, the market fell after the latest inflation data was higher than expected. Investors fear that rising inflation may refrain the US Fed from cutting interest rates further.