IS MARKET beginning to peak out? The shift in volumes from the largecap space to mid-, and small-caps would seem to suggest so, going by the conventional wisdom, say brokers. In the past few months, trading volumes in top 100 stocks by market capitalisation have shrunk by 30-40% as investors shifted focus to second-line names perceived to be relatively cheap.
“Valuation-wise, large-cap stocks look expensive, while many stocks in the mid-cap segment still offer value. Every other week, we are seeing investors take fancy to some new sector,” says Mehraboon Jamshed Irani, Sr VP-Equity, FCH Centrum Wealth Managers.
Even as retail investors continue to keep away from the market, most stocks in the second-rung space are being accumulated by proprietary desk of broking firms and mutual funds that have a mandate to invest in mid-, and small-cap counters.
Almost 2,000 companies on the Bombay Stock Exchange (BSE) are currently trading at or near their 52-week highs, as fund managers and investors bet on the next multi-bagger stocks. Large-cap stocks have been moving in a narrow range for many months now. This has prompted investors to look to mid-, and small-cap shares for higher returns.
“Large-cap stocks have already run up in the past few months and are trading at a high price-to-earning multiple (P/E). This is part of the cycle and people will continue to buy mid-, and small-caps till the valuation gap is filled,” says Bharat Shah, head-institutional sales, Ventura Securities.
“While large institutions hardly invest in companies outside BSE 200, it’s the domestic HNIs and some mutual funds which usually get attracted to these stocks,” he says.
Average daily volume in top 100 stocks by market capitalisation stood at Rs 2,860 crore and Rs 11,300 crore in November on BSE and NSE, respectively. This has come down to Rs 1,875 in the case of BSE and Rs 8,100 for NSE in March.
“While the participation from retail investors is low, it has slowly been picking up, as the market outlook has been improving in the past few weeks. But this time, the orders are smaller and the derivatives segment is a strict ‘no’ for them,” says the retail head of a domestic broking firm.
In the category of top 500 to 5,000 stocks, volumes have gone up from Rs 550 crore to Rs 822 crore for November in the case of BSE. In the case of NSE, for top 500 and above stocks in terms of market capitalisation, the turnover has almost doubled from Rs 400 crore to about Rs 785 crore.
Experts feel that there are still a good number of stocks available at reasonable valuations. But investors will have to be careful before buying them. While selecting, they should go for stocks with higher dividend yield and good earnings track record.
“Even if sentiment remains positive, the rally is expected to narrow down to select stocks in the next few days. Companies with a wide variation in quarterly earnings, and those with balance sheet problems should be avoided even if the shares have been rising of late,” adds Mr Mehraboon.
Experts feel that like in the past, shares of many fundamentally-weak companies have climbed to stratospheric levels, only to leave investors stranded later on. Investors should avoid risking their portfolio by putting in money in companies without checking their credentials.