While the benchmark indices have converged to their long-term valuations, the current market rally appears broad based with nearly a third of the BSE mid-cap universe surpassing the largecap benchmarks in terms of the year-to-date returns.
It is common for mid-cap stocks, which are considered high beta in nature, to ride the momentum when the market rallies. However, latest leg of market gains has particularly been attuned towards the mid-cap space. As a result, the year-to-date yield of the BSE mid-cap index, at 38%, has expanded its lead over the bluechip indices, both the Nifty and the Sensex by over 10%.
As many as 106 or 43% of the 246 stocks from the mid-cap index have outdone their benchmark whereas about 40% of the Nifty constituents rose more than 28%, Nifty?s 2012 rise so far. There are at least 23 stocks from the mid-cap space, including D B realty, HDIL, Dena bank, Bajaj Finance, and Jyothy lab, among that have more than doubled in 2012. Stocks like Wockhardt and Jet Airways have seen a three to four fold jump in their prices this year.
Among the Nifty stocks, however, Jaiprakash Associate is the only stock that has doubled during the period even as stocks like IDFC, L & T, Maruti Suzuki, ICICI Bank and HDFC Bank have rallied 60% to 90%.
Not surprisingly, for a third of the Nifty stocks, which are trading at a more than 30% premium to their average valuations since 2009, the premiums are in-line with the values demanded in September. Despite a run in the stock prices, the current price to earnings (P/E) multiple of some of these stocks based on the expected 2012-13 earnings, have not run higher than in September.
For example, ACC, Ambuja Cement, DLF, Grasim, Mahindra & Mahindra and Siemens are all trading at par or below the valuation premium they demanded at the end of September, after which the Nifty made an intermediate high of 5,788. These premiums ranged in the order of 30% to 70%.
However, given the high correlation of the popularity of the mid-cap stocks with the market euphoria, they are also prone to greater declines in case the market retreats. One cannot deny this possibility as the Nifty has managed to surpass 5,900 mark briefly in the recent past, depicted as the a crucial retracement of the last market fall between November 2010 and December 2011. Even the convergence of the market valuations with their long-term averages amidst the widely expected voting approvals of FDI in retail by both houses of Parliament point towards a likely breather to the market rally.
