Mumbai: Even as the benchmark equity indexes continued their ascent in July, several smaller indices, foreign equity flows and crude oil prices reversed course during the month, while the global rhetoric on trade war cooled.
In July, the Sensex and the Nifty gained nearly 6% each, their best performance in the last three months. During the month, BSE’s mid-cap and small-cap indexes rose around 3.5% each, after falling 13-16% in the year till the end of June.
Oil prices, which rose 22.34% till June, too reversed course, with Brent crude falling 5.89% during July, in a relief for policymakers. Similarly, foreign institutional investors (FIIs), who had net sold $681.49 million of Indian shares till June-end, were net buyers of $76.2 million in July, the highest since March 2018.
Analysts said optimism about corporate earnings, the normal monsoon, the government’s rural spending push and hopes of a consumption demand pick-up are driving stocks.
“When benchmark indices are faring well, it builds confidence into broader markets mid- and small-cap stocks. However, the underlying concerns including steep valuations and corporate governance issues still remain in mid- and small-cap indices. Expectations of good quarterly results in the last one month have been driving the stocks,” said Pankaj Pandey, research head at ICICI Securities.
Globally, in dollar terms, the Sensex was up 2.89% in July, while the Shanghai Composite slipped 17.13%, the Kospi fell 11.25% and the Hang Seng declined 4.88%.
The Nifty PSU Bank index gained 14.14% in July while it had lost 13.9% in the year so far.
Dipan Mehta, a member at both BSE and NSE, also agreed that as the benchmark indices’ levels have reached new highs, it has improved sentiment for mid- and small-cap stocks as well.
“Second reason is that earnings season has been decent for the companies which have declared their results so far, which is acting as a trigger to drive mid- and small-cap stocks on the higher side. Some of the macro fears like high crude prices, risk-off trade caused by global factors like trade war are receding,” Mehta added.
Crisil Ltd expects India’s macroeconomic parameters may not be excellent, but they are still much healthier than in fiscal 2013.
“With the reining-in of inflation, the growth inflation mix has been improving. The combined fiscal deficit also looks healthier as the centre has made some headway on the fiscal consolidation path. Though this combined fiscal deficit has started slipping since fiscal 2017, and might continue to be under pressure, it is expected to stay lower than in fiscal 2013,” it said in a note.
“From a global perspective, India has done better in terms of currency while crude oil prices have declined in this month. Earnings have been a positive factor especially from the non-performing sectors like IT, cement and selective pharma,” said Pandey.
Going ahead, analysts see a revival in mid- and small-cap stocks while large-caps may find it tough as heavyweights have already seen a spectacular run. “There is very little room for upside for index heavyweights like Tata Consultancy Services, Reliance Industries Ltd, HDFC Bank, HDFC, ITC, ICICI Bank and ITC as any further upmove will stretch valuations of these companies,” said Mehta.
According to him, mid- and small-cap indices may see recovery mainly on earnings, gradual improvement in consumption, pick-up in government spending, and improving capex cycle.