The Hindu Business Line : Midcaps fare better than large-caps in recent fall

BL Research Bureau Investors are usually warned to stay away from mid- and small-cap stocks in highly volatile markets, as they may be more vulnerable to stock market declines. But they have behaved quite differently in recent trading sessions.

On days when markets fell sharply, the blue-chip names in the Nifty and Sensex have usually lost more value than mid/small-caps.

In many of the trading sessions since the middle of October, the BSE Midcap index has been containing losses better than the Sensex.

Take, for example, the trading session on October 24 when markets registered their biggest single-day fall in recent history. While the Sensex lost 11 per cent on that trading session, the BSE Midcap index registered a lower loss of 8.4 per cent.

On November 11, when the Sensex registered another sharp fall of 6.6 per cent, the BSE Midcap index lost just half that — 3.4 per cent.

This trend, which started of in October, has become more visible in the current month’s trading sessions.

On days when markets weakened sharply — November 12 and November 18 (this Tuesday) — the mid-cap index actually registered a smaller fall than the Sensex.

Institutional sales

What has driven this trend? One explanation is that recent market falls have been triggered mainly by institutional selling and that these institutions are invested mainly in index and large caps.

Many market watchers believe that recent pullouts from stocks have been triggered by accelerated hedge fund redemptions ahead of the December 31 deadline.

“The primary reason for the market fall is the sell-off by FIIs and hedge funds. Since their investments were primarily in large cap stocks with select mid caps, the impact is being felt more in the large cap space,” says Mr V. Ramesh, CEO, Prabhudas Lilladher Financial Services.

Basket selling, where an institution reduces its India positions, due to redemptions, would also impact index stocks more than mid-caps.

The other explanation given is that it is only large-cap stocks that are now liquid enough to allow institutions to sell without suffering high impact costs. That could result in more active selling in large caps than mid-caps in the current market scenario.

Slower to recover?

While mid-cap stocks have surprised investors by holding up in recent trading sessions, market watchers, however, predict that it is the large caps that will lead any recovery.

Mr Himanshu Varia, Head of Institutional Sales at broking firm Asit. C. Mehta, says: “In the event market sentiment turns positive, investor interest would first be in quality large-cap stocks. Midcap and small cap stocks will rise only with a lag.”

That has been borne out by recent trading patterns as well. On days when the markets rose sharply, the Sensex rose more than the Midcap index.

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