The Indian equity market consolidated during the month, with the Nifty absolutely flat for the month. Our portfolios did much better than the Nifty, due to some strong performances among a few stocks in the portfolio. The market continues to be stock selective with fairly diverse performances among different sections of the market.
Over the last few months, we have seen very sharp up moves among the small and mid cap stocks. While the Nifty is up 18.8% since 31-Mar-14, the Mid-cap Index is up 32.6% and the Small Cap Index is up 51%. There are two reasons for this. For one, the mid and small cap indices were much beaten down during the bear market of the last few years. Also, a feature of the last few months is that the domestic investors, who typically invest in the small and mid cap space deserted the market completely. The phenomenon of desertion of the market by domestic investors, is corroborated by the fact that while the FIIs brought in about $80 billion into India since January, 2008 the previous stock market peak, the market was still at the same level till February, 2014.
Many of these domestic investors who had abandoned the market, began to rush back into the market as they sensed a clear majority for the BJP. Many of these high networth investors prefer the small and mid cap space as against the FIIs who prefer the large cap space due to reasons of liquidity. As a result, there has been a sharp run up in this space and in many instances, it appears that the stocks may have become fully valued. For us, who are agnostic about market capitalization while investing in the market, we are finding very few opportunities in this space and at the margin, we are finding opportunities to sell into this sharp rally.
On the other hand, the high quality large cap space continues to offer reasonably good opportunities as the growth in their prices has been more in line with the intrinsic value growth of these companies. While the poorer quality companies had seen a strong run in the back drop of the clear majority for the BJP, many of these stocks have seen significant corrections in recent months as this is also the space which has seen a large supply of paper in the form of Qualified Institutional Placements (QIPs). Moreover in many of these cases, the balance sheets are broken and they will need significant repair in the form of asset sales.
The big question for the investor today is whether markets have run up too sharply, or is it still a good time to invest in equities. Nifty was up 18% in the year ending March 2014 and is up a further 19% in FY2015. This is a reasonably sharp move, especially in the context of flat markets over the last 6 years. However, when one considers that the revenue growth of the average company in the Nifty is near 17% p.a, the market move is in line with the growth of the average company. Moreover, at this point of time, the margins are below historical levels, suggesting that earnings growth going forward can be higher than it has been over the last 6 years.
In summary, while it does appear that some sections of the market have run ahead of themselves, there continue to be good opportunities in the high quality large cap space and the risk reward ratio continues to be good for the long term investor.