The March ban led the broad Midcap and Smallcap indices to a total drop of -8% and -13%, respectively, from the intraday high to low between March 5 to 14. Following the low point reached last Thursday, the market bounced back, experiencing a gain of around 5% to 7% respectively. The total cut has been reduced to -4% and -7%, since Friday, closing March 22.
Technically, the rest rally is led by a reduction in retail selling while FIIs & DIIs continued their buying. In March, so far, FII and MF have brought total ₹35,011 cr and ₹31,195 cr as of March 19. Further, buying activity has continued throughout this week, suggesting that institutional investors do not perceive significant concerns about the outflow of domestic momentum.
This trend can be linked to the fact that most corrections targeted Mid & Smallcaps. Large caps make up two-thirds of India’s total market capitalization, making them the preferred investment choice for long-term institutional investors. MFs are on a buying spree as SIP volume is at an all-time high. Short-term corrections are the best time to bargain for additional investment. Further, MFs hold diversified portfolios, as evidenced by data from the top 5 mid- and small-caps, with enough allocations to large-cap, debt and cash positions that can be leveraged during reasonable trends.
In a departure from the selling observed in January and February, FIIs shifted to a buying stance in India during March. The net outflow of ₹22,111 cr in the previous two months was offset by a large net inflow of ₹37,254 cr on March 20. FIIs are the highest buyers in India in the Asian region, with a total of $4252.6 million, as of March 20. The second best is South Korea, with a net inflow of $1817.1 million.
The policy announcement by the Federal Reserve on Wednesday is expected to strengthen emerging markets, reinforcing the positive sentiment in the Indian market driven by FII. This anticipates that the Fed will start cutting the rate from June-July, regardless of whether the CPI remains above the target of 2% for some time. Moreover, core economic indicators signal a robust economy, which is favorable to corporate earnings. The Fed also plans to reduce the pace of balance sheet reduction. Since the start of quantitative easing last year, nearly $1.5 billion of assets have been sold that could support liquidity in the system.
The continued uptrend is also supported by the traders who throw the stock to buy when the market is trading at oversold territory, indicating potential in the near term. However, in the medium term, the Indian market may struggle with a distinct volatility pattern driven by inflated valuations of mid and small cap stocks, election volatility and moderation in retail inflows.
We expect the valuation of Mid and Small caps to consolidate over the medium term in anticipation of a slowdown in earnings growth in FY25. For example, the EPS (Earnings per Share) CAGR of the Midcap150 index was 35%. YoY EPS growth in FY24 is estimated at 30% YoY and is expected to slow to 20% in FY25. Its health, however, can affect a drop in premiumization. The current one-year forward P/E of Nifty Midcap 100 index is at 25x, compared to the long-term average of 21x.
The author Vinod Nair, is Head of Research, Geojit Financial Services.
Disclaimer: The above views and recommendations are those of individual analysts, experts and trading companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 24 Mar 2024, 17:10 IST
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