Largecaps & Midcaps: Bridge the gap

An interesting trend in recent months is the growing divergence between BSE Sensex and the broader market. We can take BSE500 as a proxy for the broader market. The difference in oneyear returns between BSE Sensex and BSE500 is around 13%. While BSE500 is up around 34% in one year, BSE Sensex is up around 47%.
Also, BSE500 is underperforming the Sensex. In other words, the 30 large caps which comprise the Sensex are handsomely beating the broader market. This is not normal. In the previous two years, the difference between the two has never been more than 6-7%, and mostly less than 5%. BSE500 has been ahead of Sensex on more occasions. The Sensex has inched ahead of BSE500 since the beginning of this year, and the difference has been 6-7% or more since April. That was when the Sensex crossed 11000 for the first time.
The Sensex leading the broader market by such a large margin suggests that investors aren’t comfortable with the market at these levels. They aren’t willing to put their money on weaker counters, which these mid caps or small caps found in BSE500 typically are. Investors may have preferred to play safe and concentrate action only in the top 20-30 stocks since April. The gap between BSE 500 and Sensex cannot continue for long.
There are two ways in which this can be bridged — either the Sensex comes down or the BSE500 goes up in comparative terms. If the sentiment was bullish and money was pouring in, then perhaps the latter situation mode would have occurred. After all, the Indian economy is on a roll, and corporate profits are rocking. The International Monetary Fund (IMF) has also raised global growth expectations to 5.1% for ’06.
However, foreign brokers are still saying India is one of the most expensive markets in the world. Though FII money is not going out, it isn’t pouring in either. So right now, we would bet on Sensex stooping down to meet BSE500. So, a correction may be required. As we have noted earlier, it is always likely that operators are pulling up a few Sensex stocks expecting to pull up the rest of the market with it. For the last 2-3 months, retail investors haven’t obliged, and neither have local equity mutual funds, which perhaps are still not fully invested.
Source: ET

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Parting Thought:
  • We like to buy businesses. We don’t like to sell and we expect the relationship to last a lifetime. – Warren Buffett
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