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Mid-Cap Correction Likely

There was a reversal in the equity story so far with large-caps beating the mid-caps at the returns game. Pharma and FMCG stocks had a phenomenal week, outperforming all other sectors.

This week there was a cautious bullishness at the bourses. The caution was largely due to mid-cap stocks, while the bullishness was on the large-caps, particularly in the FMCG and healthcare sectors. In other major happenings, Zee Telefilms had an extremely volatile week, with the stock gaining hugely after the award of the cricket telecast rights by BCCI early in the week and then the subsequent uncertainty when ESPN-Star Sports challenged the verdict.

The benchmark indices registered sharp gains this week, representative of the positive sentiment surrounding large-caps. The 30-stock Sensex rose 2.9 per cent on the back of a sharp increase in prices on Friday when the index gained over 1.3 per cent. The 50-stock Nifty too gained 2.12 per cent. Broader indices kept pace with the gains in the benchmark indices. The S&P CNX 500 gained 2.09 per cent over the week. However, mid-caps failed to keep pace. After outperforming the Sensex for five continuous weeks, the CNX Mid Cap 200 was beaten at the returns game. The index gained 1.84 per cent, healthy in absolute numbers, but the fact that mid-caps have fared worse than the large-caps might be indicative that at current market prices some of the mid-caps look overvalued and may be set for a correction.

Among sectoral indices, IT stocks were able to match the broad market returns. The BSE IT Index gained 2.05 per cent in the week. Oil PSUs suffered because of the volatility in the international prices of crude. Moreover, with banking stocks also taking a hit late in the week, PSUs ended as the market laggards this week. The BSE PSU Index registered only a measly 0.31 per cent increase during the week. The BSE Bankex, however, performed better gaining 1.59 per cent. This was due to the government's decision to ease investment norms on their Held-to-Maturity portfolio.

The real buoyancy however was noticed in the healthcare and FMCG sectors. The BSE Healthcare Index gained a stunning 4.72 per cent during the week while the BSE FMCG Index bettered even that with a weekly return of 6.20 per cent. After a prolonged spell of selling, the valuation of some of the pharma and FMCG stocks attracted buying interest. Among pharma stocks, heavyweights Ranbaxy and Cipla had a very good week, as did mid-cap pharma stocks. In FMCG stocks, ITC and HLL were the major gainers. ITC gained heavily on Friday after the Supreme Court ruled in favour of the company on a Rs 803 crore tax dispute. The HLL counter has been witnessing a sustained spell of buying ever since the company's stock price hit its seven-year low after a poor first quarter results on expectation of better fortunes.

The combined average turnover at both the NSE and BSE fell further by 2.56 per cent. FIIs continued on their purchase-binge increasing their combined equity holdings by Rs 269.3 crore during the week. On Friday, their net holdings increased by Rs 155.8 crore. Domestic mutual funds however decided to adopt the cautious approach, especially given the speculative movements in select mid-cap stocks. Till Thursday, their net exposure had come down by Rs 4.56 crore.

Mid-cap stocks could be in for a correction. But the overall buoyancy in mid-caps is expected to continue particularly for the engineering, sugar and pharma stocks. Heavyweights could benefit from this correction as nervous investors settle for more stable stocks.

Among heavyweights, petroleum stocks' performance would be intricately linked with international prices of crude. The positive sentiment in FMCG stocks, particularly HLL, is expected to continue. Maybe it is time that investors, particularly those with a lower risk appetite, should consider shifting part of their portfolio from mid-caps to large-caps.