Two markets in one: Not seen earlier

Over the past two months, in four separate columns, I have highlighted the significant slowdown in the Indian economy, which is now clearly reflected in the stock prices of major sectors such as passenger cars, consumer goods, banks, financial services, and infrastructure.

- DEBASHIS BASU

The two key market indices, the Nifty and Sensex, peaked on September 27 and have since shown little momentum. A sharp two-day rally, a day before and after the Maharashtra election results, was seen as a lucky break for foreign institutional investors (FIIs) to resume their selling. While each such wave of selling will be countered by some buying, the bullish fervour is missing. The traditional year-end rally is due, especially because the past two months were dismal. But there is a more intriguing aspect of the market, hidden behind the Nifty moves.

Between September 27 and November 29, the Nifty was down 8 per cent. However, amazingly enough, both the Nifty and BSE smallcap indices were down only 3 per cent and the Nifty microcap dropped a mere 2 per cent. This is unusual. In a bull market, smaller companies typically outperform their larger counterparts. But in a downturn, smaller companies usually bear the brunt of the losses. This time, that's not the case. What explains this anomaly? Investors are optimistic about smaller companies for a reason. The heroes of India's growth of the past four years have been smaller, efficient companies in green energy, electrical equipment, defence, health care services (hospitals and diagnostics), a variety of manufacturing sectors, infrastructure (including railways), consumer technologies, and retail financial services (including wealth management). New sunrise sectors such as electronics manufacturing services (EMS), recycling, smart metering, and data centres are dominated by small companies.