Mid and small caps steal the show

Although settling at lower levels than what they started off with, the benchmark indices still managed to close in the positive for the third day in succession. While the BSE Sensex edged higher by around 90 points (up 0.6%), NSE Nifty closed around 40 points (up 0.8%) above yesterday’s close. BSE Midcap and Small cap stocks however witnessed the maximum buoyancy as the respective indices closed with more than 2% gains. Amongst Sensex stocks, every two stocks gained for everyone that declined.

While most Asian markets ended strong today, majority of the European indices are also trading in the positive currently. The rupee was seen trading Rs 46.8 to the dollar at the time of writing.

The Indian markets have now risen for the third day in succession and that too by a significant margin. However, they are still a fair distance away from the current rally’s peak of 17,000 or thereabouts reached on the Sensex a few weeks back. Thus, any thoughts that we have embarked on a journey towards a new high would seem a little out of place. The fact that the current quarterly results were not able to do so, that is take the markets to a new high, goes to show that most of the earnings improvement was already factored into the markets.

The sentiment globally is not very positive either as troubles have resurfaced at some big financial institutions and fears with respect to bubbles being created in certain asset classes have also started gaining ground. As far as India is concerned, while there is no bubble just yet, stocks aren’t hugely underpriced either. Taking a bottom up approach and zeroing in on fundamentally strong stocks that have beaten down on account of some near term concerns but have a strong long term fundamentals is perhaps the best approach to have right now.

Top gainers amongst BSE-A group stocks today were some PSU names like MMTC, RCF and NMDC limited. Indeed, the buoyancy in these counters is a result of the government’s decision to dilute stake in profit making PSUs. But if that is the only reason behind the strong gains then perhaps investors have to be a little cautious as apart from increased liquidity, we don’t see any structural changes taking place in these companies. While the government will indeed dilute some of its stake, it will not cede its majority ownership status and hence there will be status quo as far as operations of the companies are concerned. Hence, without a change in fundamentals and the underlying management, the buying interest does not seem justified to us.