Midcaps Shine as Indian Largecaps Slide With Asia on Taper Bets

  • Domestic mutual funds active in the midcap space: Systematix
  • Fear of stumulus withdrawal spooks global equity markets

Indian small- and mid-cap stocks rose to a record even as their bigger counterparts dropped amid concern global central banks will reduce stimulus.

The benchmark gauges erased intraday gains to end a three-day rally. Trading action shifted to medium-sized companies, with overseas investors, the key drivers of volumes, weighing the prospects of a tighter monetary policy, according to Systematix Shares & Stocks (I) Ltd.

“Domestic institutions, flushed with funds, are buying midcaps while foreign investors are not currently entering large-cap stocks in a big way,” said Arun Gopalan, vice president for research at Systematix Shares in Mumbai. “That’s why the mid-cap index is rallying hard compared to the broader market.”

Mutual funds have bought $2.2 billion of shares since Jan. 1, extending last year’s record inflow of $10.2 billion, data compiled by Bloomberg show. A bulk of the purchases have been in companies whose earnings are tied to the local economy such as providers of financial services, staffing firms and operators of diagnostics chains. That’s pushed up the S&P BSE MidCap Index 22 percent this year, compared with an 8 percent rise in the S&P BSE Sensex.

IndexChangeSize and scope
BSE Sensex-0.4%Ending 3-day advance
NSE Nifty 50 -0.3%Biggest drop in a week
S&P BSE MidCap+0.5%Record
S&P BSE SmallCap+0.6%Record

The losses in India’s main indexes tracked declines in the MSCI Emerging Markets Index, which halted a two-day rally after Bloomberg News reported that some European Central Bank officials had held informal discussions on the best way to bring quantitative easing to an end. The prospect of less stimulus from the ECB is a double whammy for emerging markets as it comes as futures contracts show rising odds of the Federal Reserve raising borrowing costs by December.

“The U.S. economy is getting better and better so a rate hike in December seem to be a given,” Vikas Gupta, an executive vice president at Arthveda Fund Management Pvt. in Mumbai, said by phone. “Brexit, issues at European banks and continuation of stimulus are bigger concerns. There’s bound to be volatility as people are a bit of unsure."

A jobs report due later this week is forecast to show a pickup in the pace of hiring and will help shape expectations for U.S. monetary policy. The odds that the Fed will raise borrowing costs by December climbed to 61 percent on Tuesday, from about 50 percent a week earlier.

The Sensex is valued at 15.8 times projected 12-month earnings, while the MSCI Emerging Markets Index is valued at a multiple of 12.5, data compiled by Bloomberg show.

  • Hindalco Industries Ltd., the second-largest aluminum maker, added 1.9 percent in a fourth day of gains. Copper producer Vedanta Ltd. climbed to its highest level since June 2015.

  • Asian Paints Ltd. rose to an all-time high. Hindustan Unilever Ltd., India’s biggest household products maker, gained 1.2 percent.

  • Tata Global Beverages Ltd. rallied the most since June 2014, the best performance on the S&P BSE 100 Index. The company, which has a joint venture with Starbucks Corp., is getting swept up in the frenzy for mid-cap shares, said Suniil Pachisia, vice president at Pratibhuti Viniyog Pvt. in Mumbai, said by phone.

    “It’s a quality stock that was ignored by major participants, and is now catching up with the market’s fancy for midcaps," Suniil Pachisia, vice president at Pratibhuti Viniyog Pvt. in Mumbai, said by phone. ‘‘Starbucks outlets are drawing crowds in all cities.” The stock has risen 4.9 percent since Jan. 1, lagging behind the gains in the main index.

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