Mid-, small-cap indices outperform benchmarks, but analysts warn over frothy valuations

Broader indices outperform benchmarks

Reversing the losses seen on March 6, the mid-, small-cap indices outperformed the benchmark indices Nifty, Sensex on March 7 amid broad-based buying.

A declining dollar index and the fall in benchmark US treasury yields aided investor sentiment. Global markets were also optimistic after US Federal Reserve Chairman Jerome Powell reiterated the possibility of rate cuts this year and ruled out near-term risks of economic recession.

All of the above positive factors combined caused the Nifty 50 and Sensex to open at fresh all-time high levels. The overall optimism in the market flowed to the broader indices as well.

While the benchmarks Sensex and Nifty 50 traded flat after their record opening, BSE Midcap and BSE Smallcap indices were up 0.5% and 0.9%, respectively.

Zee Entertainment Enterprises, Solar Industries India, Oracle Financial Services Software, Glenmark Pharmaceuticals, and PB Fintech led the gains in BSE Midcap. Meanwhile, Rallis India, Tata Chemicals, Force Motors, IIFL Finance, and Primo Chemicals were the top gainers in BSE Smallcap.

Tata Chemicals has been rallying since March 1 after the company said that Fitch Ratings affirmed its Long Term Foreign Currency Issuer Default Rating (IDR) at BB+. The rating agency has also revised the outlook to “stable” from “positive”. The rally could also be attributed to Spark Capital saying that Tata Sons, the parent company of the Tata Group, could list within the next 18 months.

Tata Chemicals shares zoomed around 14 percent in morning deals on March 7 to hit a 52-week high of Rs 1,349 on NSE, extending gains to the sixth consecutive session.

Rallis India, a subsidiary of Tata Chemicals also surged over 13% on March 7, following the footsteps of Tata Chemicals.

However, analysts believe that the valuations in the broader markets are stretched. "The 3.7% decline in the smallcap index this week when Nifty appreciated by 0.5% is a big underperformance. This trend is likely to continue since valuation in the broader markets remains highly elevated and the regulator has sent a clear message regarding the froth in the segment. Therefore, investors have time, even now, to switch from small caps to fairly valued large caps and partly to fixed-income products. At this stage in the market, safety should be given priority over return," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Also Read | Meltdown in broader market as midcaps, smallcaps burn amid heavy selling