Indian Indices Trade Higher; Smallcap Stocks Outperform

Mon, 14 Sep 12:30 pm

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Share markets in India are trading higher today following Asian peers as hopes of a coronavirus vaccine were rekindled after AstraZeneca resumed its phase-3 trial.

The BSE Sensex is trading up by 323 points, up 0.8%, at 39,200 levels.

Meanwhile, the NSE Nifty is trading up by 96 points.

HCL Tech and Infosys are among the top gainers today. Bharti Airtel, on the other hand, is among the top losers today.

Broader markets rose after markets regulator issued a clarification on multi-cap allocation circular. The BSE Mid Cap index is trading up by 2.1%. The BSE Small Cap index is trading up by 4.1%.

On the sectoral front, gains are largely seen in the IT sector.

The rupee is currently trading at 73.33 against the US$.

Gold prices are currently trading up by 0.2% at Rs 51,436.

Speaking of share markets, in one of his recent videos, Vijay Bhambwani talks about a topic that has been trending on the internet recently.

It's the dabba market.

Tune in below to know what this market is all about...

In news from the metal sector, as per an article in The Economic Times, Indian steelmakers are witnessing a demand surge from the auto sector as the beginning of the festival season late August drives sales of cars, tractors and two-wheelers.

Tata Steel said it is seeing positive demand in the rural markets for tractors followed by motorbikes.

"The worst phase is behind us as far as auto demand is concerned. The forecast for the month of September is better than what it was in August and July", a Tata Steel spokesperson told the Economic Times.

Earlier this month, JSW Steel reported a 5% rise in August crude steel production at 13.17 lakh tonnes.

During the month under review, the production of flat rolled products grew by 15% YoY to 9.80 lakh tonnes from 8.51 lakh tonnes in August 2019.

Speaking of the metal sector, note that metal stocks have rebounded sharply from their March lows, with revival in both domestic and global demand.

Have a look at the chart below which shows returns of the major sectoral indices since 23 March 2020.

As per Apurva Sheth, the secret behind the rally in metals is nothing else but its greed and fear cycle. The greed phase in metal stocks will last till September 2021.

As per Apurva, the sector has a lot more ground to cover up in a short span of time.

He has been sharing with you such greed and fear cycles in stocks, currencies, and even commodities.

How metal stocks perform in the coming months remains to be seen.

Moving on, smallcap stocks are in focus today with the BSE Smallcap index recording its sharpest intra-day rally in over five months, after the markets regulator tweaked rules for multi-cap mutual funds.

The markets regulator clarified that multi-cap schemes need not necessarily churn their portfolios by selling largecap stocks or buying smallcaps in multicap schemes to meet the new norms.

Reports state that the development has given a fresh trigger to the mid-and small-caps that can see some uptick in the days ahead.

Among individual stocks, Multi Commodity Exchange of India, Syngene International, City Union Bank, Galaxy Surfactants, APL Apollo Tubes, AstraZeneca Pharma, Kajaria Ceramics and Blue Star from the BSE smallcap index rallied over 10%.

As much as 34 stocks from the smallcap index hit their respective 52-week highs today. The stocks include Tata Elxsi, Strides Pharma Science, Ramco Systems, Adani Green Energy, Firstsource Solutions, Indo Count Industries, Laurus Labs and Mastek.

Here's what Richa Agarwal, editor of our smallcap recommendation service Hidden Treasure, has to say about the above developments...

• In 2017, the market regulator came up with categorisation and rationalisation norms for mutual funds that led to massive outflow of funds from smallcap space.
  
  Even fundamentally strong stocks in smallcaps were penalized because of regulation, that led to sharp correction in smallcaps and widening of valuation gap between large caps and smallcaps.
  
  At present, multicap funds' allocation to smallcaps is way below the suggested 25% limit. In most cases, it is well below single digits. So, these were hardly multicap funds, just mis-sold to investors with that impression. The decision on Friday for multicap funds is likely to bridge the gap between smallcaps and largecaps.
  
  That said, the long -term beneficiaries of this move will not be just any smallcap, but the ones with higher liquidity, strong balance sheets, sustainable business models and growth prospects and that are run by managements with strong reputations. I believe the move will lead to strong valuation gap within the smallcap space - with quality and liquid smallcaps surging higher.
  
  There are some concerns that this could lead to redemptions and launch of lesser multicap schemes in future, thus hurting smallcaps in the long term. I believe it's too early to come to such conclusions. There are smallcaps with huge potential to scale up and for rerating. And most largecaps don't deserve a valuation that they are trading at.
  
  That said, if one is buying smallcaps just hoping for a rally without doing a check on fundamentals and valuations, I think it would be detrimental for long term wealth. The decision on Friday for multicap funds, is likely to bring more transparency in the industry.
  
  Post Friday's announcement, the regulator has issued clarification that in order to comply, apart from rebalancing, AMCs can facilitate a switch in the scheme for the unit holders. They could even merge existing multicap schemes with other schemes, or convert them to large cap cum midcap scheme.
  
  Given this optionality, one should not consider investing in smallcaps in hope of a regulation driven rally. The only way to get rich in smallcaps is to be very selective about fundamentals, valuations and management quality. There are smallcaps with huge potential to scale up and for rerating. With right approach and allocation, there is a great scope of building lasting wealth in the smallcap space.

And here's what Tanushree Banerjee, editor of our safe stock recommendation service StockSelect, has to say about this development:

• The 25-25-25 allocation directive for multicap funds does not seem to be an 'all weather' solution. Funds will find it rather difficult to stick to this allocation as and when smallcaps get too expensive or too risky. Meanwhile, this directive will lead to a correction in select bluechips and a rally in mid and smallcaps in the near term. However, this trend will be temporary. Eventually, smart money will move to stocks that offer returns with reasonable degree of safety.

How this pans out remains to be seen. We will keep you updated on all the news from this space. Stay tuned.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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