Stock market experts suddenly (sometimes self proclaimed) have started claiming that the market is overpriced. Never mind the fact that they were justifying the higher valuations of stocks until two weeks ago, arguing the India growth story justifies for the higher valuations. So, what exactly has changed? Has the market really became expensive? Is it time to be cautions?
What is happening in the market now is that the sensex is driven by large cap stocks. The small and mid cap stocks are not part of thee rally. This means the overall market is not overpriced. Sure, the market is highly priced, but you canâ€™t say it is overpriced.
In 1992 the sensex was around 4,500 the and p / e (price to earnings ratio) was around 42. In 2000, when the sensex was around 6,000 level, the p / e was 28. Today, when the sensex is hovering around 19,000, the p / e is quoted around 25. This clearly shows that though the market is highly priced, but it is definitely not overpriced. Unlike 1992 when the economy was not driving the rally, these days strong economic growth justifies higher valuation. During the period of 1992, the economy was not doing well. It was pure market hype. In 2000, again the market was driven by external factors. But look at what is happening today. Companies are springing up surprises every quarter. Due to their phenomenal performance, despite the higher indices the p / e ratio continues to remain low. The earnings per share can definitely justify the higher valuation.
The current rally is not a broad based one. A few select stocks like, say Reliance group is leading the rally. Capital goods sector is also supporting it. But there are many stocks in the market which are left behind. Only index based stocks have fared very well. This may lead to an interesting phenomenon when the markets will come down. Mostly when the market goes down, the A group comprising leading stocks would suffer the least. The B group stocks would be battered. However, this is not going happen this time. It will be a different scenario this time around. This scenario presents good opportunities to investors. Since the frontline stocks have gone up so much and they are likely to suffer during corrections. Therefore it is time to turn investorsâ€™ attention towards small and mid cap stocks. For most people mid cap stocks are second rate stocks. But today there are still plenty of stocks in this segment with attractive valuations.
Considering the current business environment and growth of economy our advice to investors is to pick up midcap stocks with great potential. The sensex may move in the band of 2000-3000 points. It is time to focus on stocks with attractive valuations and growth potential. Most potential sectors that can be looked at are auto, Pharma, sugar industry which are not popular currently. These sectors have the potential to come up with a turn around performance.
Companies can be classified as mid cap or small cap depending on their market capitalization, which is the total number of shares issued by the company multiplied by the market value of each share. There is no standard definition classifying companies as either small or medium, and every fund house has its own set criteria for segregating mid caps.
Broadly speaking companies with a market capitalization of up to Rs 500 crore are classified as small whereas those with a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. Mid cap funds invest in these medium sized companies and can also be classified as funds investing in the companies specified by the CNX Mid cap and the BSE Mid cap indices.
Well managed mid cap units provide a faster capital appreciation. Mid cap units are growing faster than their large cap counterparts.
The outlook for mid cap funds is quite attractive and they have a lot of room for growth as the economy marches ahead. Moreover, mid cap funds are better equipped to withstand the downturns and competitive pressures as compared to small caps.
There has been a marked shift from large caps to mid caps because the latter is witnessing tremendous growth opportunities where investments are concerned. Mid cap funds not only help the investor to go beyond the usual large blue chip stocks but have also shown phenomenal growth in recent times. â€“