Single stock rallying markets, unnerving – Time to be cautious

The week gone by saw markets jump sharply this week and the gains registered on that day were enough to keep indices in positive territory. BSESENSEX gained 497.37 points or 1.30 per cent to close at 38.854.55 points while NIFTY gained 130.60 points or 1.15 per cent to close at 11,464.45 points. The broader markets saw BSE100, BSE200 and BSE500 gain 1.07 per cent, 0.91 per cent and 0.77 per cent respectively. BSEMIDCAP lost 1.06 per cent while BSESMALLCAP was down 0.31 per cent.

The Indian rupee lost 40 paisa or 0.55 per cent to close at Rs 73.54 to the US Dollar. Dow Jones was under pressure and lost 467.67 points or 1.66 per cent to close at 27,665.64 points.

Markets last week were a mixed bag and the final weekly outcome is certainly not reflected in the numbers. While indices were up between 1.15 per cent and 1.30 per cent the benchmark indices components were largely down. Reliance Industries was the notable exception, gaining a massive Rs 242 or 11.65 per cent. This translates to roughly 1.4-1.5 times the weekly gains on the SENSEX and NIFTY. Bulk of the gains in Reliance came on Thursday when the stock gained Rs 154 and SENSEX was up by 647 points. The important news for Reliance was the investment by Silver Lake of Rs 7,500 crore to buy 1.75 per cent in RRVL (Reliance Retail Ventures Limited) valuing the company at Rs 4.21 lakh crore. This also made the market cap of Reliance Industries to cross 200 billion dollars, making it the first Indian company to do so.

The two primary market offerings which opened and closed during the week had a fantastic response and showed that retail investors are more than willing to invest in the primary market. The first issue from Happiest Mind Technologies Limited saw the issue overall getting subscribed 150.98 times. The QIB portion was subscribed 77.43 times, HNI portion 351.46 times and Retail portion 70.94 times. The price band was Rs 165-166. The issue consisted of a fresh offer of Rs 110 crore and an offer for sale of 3.55 crore shares. There were over 22 lakh applications in the issue.

The second issue during the week was from Route Mobile Limited and was subscribed 74.36 times. The QIB portion was subscribed 91.06 times, HNI portion 195.61 times, Retail portion was subscribed 12.85 times. The price band was Rs 345-350. The issue comprised of a fresh issue of Rs 240 crore and an offer for sale of Rs 360 crore.

SEBI has come out with a fresh set of guidelines for mutual funds who run multi-cap funds. These guidelines are to be effective January 2021 and would change the way these funds/schemes are run. These guidelines are quite contrary to what was specified when they came out with guidelines for funds some two years ago. The new guidelines state that any Multicap fund would have to invest a minimum of 25 per cent in each of the three categories of stocks namely large cap, mid cap and small cap. At present the corpus of all the Multicap funds run by various mutual funds is Rs 1.47 lakh or say Rs 1.50 lakh for discussion purposes. This implies that they would have to invest Rs 37,500 in midcap and Smallcap each. The largest fund in Multicap is Kotak at 29,714 crore. The present break up is 28 per cent or Rs 8,300 in midcap and a mere 0.3 or Rs 90 crore in Smallcap. This implies that a sum of Rs 6,200 crore would have to be invested in Smallcap stocks. This is easier said than done as the definition of Smallcap begins at serial number 251 of market capitalisation which based on six months average ending June 2020, shows the stock market capitalisation at Rs 6,955 crore. The 500th stock has a market cap of Rs 1,695 crore while the 1000th stock is at Rs 313 crore. The 3000th stock comes in at Rs 10 crore. This implies that there is virtually no depth in the small cap category.

The first thing that comes to mind is that Smallcap stocks would have a field day at the bourses. This would be incorrect as schemes of mutual funds would have to write to unit holders and ask for consent to change the system of fund allocation. They would also have to offer a no-load exit to those not willing to continue. With there being hardly any liquidity in the Smallcap segment, it would be impractical to expect this scheme from SEBI to become successful. Fund managers would ask for the scheme to be fine-tuned at least as far as small cap is concerned.

On the Covid-19 front, the number of patients globally has increased to 289,46,628 people with 924,610 deaths and 208,13,150 people recovering. In India, the number of affected people has risen to 47,54,356 people with 78,614 deaths and 37,02,595 people having recovered. Compared to the previous week globally there were 18,76,644 new patients, 40,830 deaths and 16,42,264 people having recovered. In India, there were 6,39,583 new patients, 7,910 deaths, and 5,21,596 people recovering.

Coming to the week ahead in markets expect volatility to increase. While there could be some movement in small and midcap stocks on account of SEBI changes for mutual funds, they would be unsustainable as there is still time for their implementation. Mutual funds would ask for more time to implement and the bifurcation may see more changes as the 25 per cent for Smallcap looks impractical. Secondly, that the rally last week was more based on a singular stock Reliance, is certainly not comforting. If the rally is to sustain the same has to become broad-based, it cannot be so narrow. The strategy for the week would be to sell on rallies and wait for markets to correct before initiating fresh purchases..