Midcaps continue to fall

A late recovery in frontline shares pared the losses in the Nifty and the Sensex, but bears had a free run at mid-cap and small counters on Thursday. The session was marked by volatility as the sentiment in world markets continues to be fragile. The 30-share Sensex bounced from an intra-day low of 18,182.83 to close at 18,526.32, down 76.30 points or 0.4% over its previous close. The 50-share Nifty closed at 5,519.35, down 41.70 points over Wednesday. Midcap indices on both the exchanges took a beating, ending nearly 2% lower.

Near term signals are confusing, say market watchers. Nifty November futures closed at a 17-point premium. However, with foreign institutional investors steadily pulling out money, stock prices are likely to be under pressure for some time, feel a section of players. According to provisional data on the BSE, FIIs net sold Rs 2487 crore worth of shares on Thursday.

Players expect volatility over the next week in the run up to the expiry of the current month derivative contracts. According to Hiten Sampat of Parag Parikh Financial Advisory Services, bulls usually spread bearish rumours on the eve of the expiry so that they can rollover their positions at a cheaper cost.

While rolling over a derivatives position, if the price difference between the futures contract for the next month and the current one is lesser, the costs of the transaction are lower. Mr Sampat expects the market to remain volatile with a “downward bias” until the expiry of derivatives contracts coming Thursday.

Despite the sell-off in second line shares on Thursday, leading brokerages feel these shares are likely to outperform their large-cap counterparts in the near to medium term. CLSA, the French broking giant, recently held its annual forum where it pointed out that with mid caps trading at a discount to the large caps, there was strong investor interest in these shares.

Educomp, Everest Kanto, Jain Irrigation, Opto Circuits and Shriram Transport are some of its top picks in this space, the brokerage said in a note to its clients.

However, the key question is whether there are sufficient triggers for the market regain lost ground near term. “While the Q-o-Q (quarter-on-quarter) growth momentum should be positive given the pickup in industrial activity in 2HFY08, the YoY(year-on-year) growth should be slower due to higher base effect, lagged effect of interest rate hikes earlier this year, along with adverse impact of currency appreciation for some sectors,” said a note by brokerage house Deutsche Equities to clients.

“In FY09, given increasing risks of a US-led global slowdown we think the chances of meaningful earnings upgrade are rather slim at this stage — though we note that India is not as vulnerable as many other emerging markets,” the note added.