December has been a great month for traders with most participants making a killing in midcaps. People have shied away from trading the Nifty because serious gains have been made elsewhere. For the moment, the Sensex or Nifty don't seem to matter. This state of affairs can last for some time but not too long. If this market has to move up, large caps will have to start moving again. Else the whole market will correct.
The reasons are technical and fundamental. Technically, FII money has dried up significantly in the last six weeks, there has actually been a substantial outflow. Largecaps, therefore are deprived of liquidity, an important reason for their relative underperformance. The fundamental reason is equally important : large caps today are quite expensive. In a momentum phase, almost anything can be justified but an objective look at valuations for many index stocks will tell you that they are in overvalued zone. Now, the sensex PE may not be so material as aggregations tend to hide more than they reveal. With the exception of IT and oil marketing, most sectors seem to be trading at historically high multiples, even adjusted for growth. Power is outright expensive, real estate too, banks are at the higher end of their valuation multiples, telecom isn't exactly cheap - particularly in light of recent developments, cement stocks in Enterprise value/tonne (Ev/Ton) terms look rich and auto/FMCG while not expensive have question marks on growth. Metals are not expensive in absolute terms but not cheap as cyclical sectors go. Big boy Reliance is rock solid but hardly inexpensive. Now none of this would have mattered if the liquidity tap was open as it was till the P note curbs came in. So the key issue is of flows.
January is the time when the technical picture may improve. We hear 63 new FII registrations have been granted in the last month. These newly registered entities may get back to buying India in early 2008. In any case, new allocations for emerging markets are expected in January. Domestic institutions will also be flush with cash . NFOs are open as we speak and between them should easily mop up 2-3 billion dollars. Finally, there are the insurance companies for whom the Jan-March quarter is the best. A few billion dollars of premia should get added to the equity kitty .
The smart money may see this coming and switch into large caps in the last fortnight of December. It's happened before.
Executive Editor, CNBC-TV18