Investors readying to risk it on the laggards

Mumbai: Investor risk appetite is steadily spreading to every nook and corner of the market with stocks that have been mostly ignored in recent times jumping on the bull bandwagon. With concerns over the Covid-19 pandemic receding on optimism around the vaccine, and central banks keeping the system flush with excess liquidity, investors are finding merit in lapping up underperformers among mid-caps, small-caps, PSUs, power and construction stocks. The raging bull rally in many of these stocks is, however, making the seasoned nervous.The BSE MidCap index has gained 16.6% since November 1 and the SmallCap index has gained 16.3%. The BSE Sensex has gained 13.8%. While the Sensex and Nifty have been hitting fresh records every other day, the drivers of the rally have mostly been beaten-down banks like SBI, ICICI Bank, Axis Bank, Tata Steel and L&T among others. For instance, SBI, which gained 3% between March 24 and October end, is up 39% since November 1.In the rally from March to early November, the big gainers were TCS, Infosys, Reliance Industries, HDFC Bank and HDFC among others.“The difference in valuations between large-caps and midcaps till some time back was quite high. With the confidence returning, the valuation gap is coming down,” said Rajat Rajgarhia, CEO, Motilal Oswal Institutional Equities.This has been a trend worldwide. For instance, the Russell 2000 index, which is the benchmark for small-cap stocks in the US, climbed more than 18% in November — its best monthly gain since inception in 1984.Investors were unwilling to touch many of these stocks with a barge pole because their earnings performance lagged those of the so-called quality or growth companies that have been the outperformers in recent years. But, the fresh gush of foreign money, thanks to the easy monetary policies by central banks in developed economies, has prompted investors to try out the untouched areas of the market. For instance, PSU shares, which have been out of most investor portfolios, are seeing fresh interest. The BSE PSU index is up almost 24% since November 1.The rise in the advances-declines ratio across share categories is an indicator of the strength in the broader market. This ratio, which compares the number of stocks that closed higher against the number of stocks that closed lower than the previous day, has been 1.4 on an average since November 1. Between March 24 and October end, this ratio was 1.2.“This gush of money hasn’t been seen before. When extra profits are generated, the rally spreads to cats and dogs,” said Sanjiv Bhasin, director, IIFL Securities.79596954Foreign portfolio investors have pumped in ₹10,356.72 crore so far in December after pouring in a record ₹69,000 crore in November.Some market participants said this momentum in the market cannot sustain.“It is getting more broad-based but the one-way upmove between March and now may not sustain forever. We are already trading at higher valuations than the long-term average,” said Harsha Upadhyaya, CIO-equity at Kotak Mahindra Asset Management Company. At 21.8 times, Nifty’s 12-month forward PE is at 42% premium to its 15-year average — an all-time high.“Broadening of the rally has been healthy but this rally has spread to circumspect,” said Bhasin.

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