Broader Markets Stealing the Show!

Those of you having portfolios tilted towards Small-Cap and Mid-Cap stocks would be witnessing a sharp reversal in their performance over the past few days. This is a welcome sign coinciding with the start of the financial year. The broader equity market, after underperforming the frontline index for little more than one year, now appears to be turning around. While the Large-Cap index represented by Nifty 100 has given negative returns, the mid-cap and small-cap indices are up by anywhere between 1.5-2.1 per cent. There could be many reasons for this, though the most plausible is the unexpected change in the stance of the monetary policy. 

In its last meeting, the Monetary Policy Committee (MPC) decided to give the hike in interest rate a pause. This was a unanimous decision. Also, the Consumer Price Index (CPI) eased to 5.66 per cent for the month of March, staying below the upper range for inflation set by the Reserve Bank of India (RBI). We have noticed that small-cap and mid-cap stocks tend to outperform large-cap stocks during periods of falling interest rates as smaller companies tend to benefit more from increased investment and growth opportunities. 

In this issue’s cover story we have explored in detail the relationship between inflation and equity returns and highlighted the bright spots that one should look at if the inflationary environment persists. For sure you will know after reading the cover story which sectors did well historically when inflation persisted and which ones underperformed. Further, the current issue is a special one as we have analysed the public sector undertaking (PSU) sector in detail. The PSU sector is strategic to India’s growth story and is always on the radar of equity investors. 

Indeed, several stocks from the PSU sector have managed to create wealth for investors in FY23. Some of the top-performing mid-caps in the past year that gained more than 50 per cent belong to the PSU sector, including HAL, Union Bank, Bank of India, and others. Meanwhile, in our special story we have commented on the automotive ancillary sector and its prospects. As the demand for automobiles continues to rise, the demand for automotive ancillary products and services will continue to post an upward curve as well. The special story will help you understand the growth triggers for this sector. 

Going ahead the equity market is expected to take cues from the Q4 results. While we could wait for some time to assess the performance to conclude on whether the broader market performance has really bottomed out, what we have witnessed in the past is that once they bounce back they tend to outperform the market with a big margin. Hence, my advice is to remain invested and consider increasing your allocation towards the broader market in a staggered manner. As is often said, tough times don’t last forever and it would be best to look at sustained investing over a longer period of time than give in to knee-jerk reactions.

RAJESH V PADODE
Managing Director & Editor