Speculative trading by retail investors may be the reason for wild swings in mid & smallcaps: Umesh Mehta

Retail investors are more speculative than long-term investors and their participation too could have caused this swing in prices in the mid and smallcaps, Umesh Mehta, Head of Research, Samco Group, said in an interview with Moneycontrol’s Kshitij Anand.

edited excerpts:

Q) It was a steady week for markets. What were the factors which contributed to the rise? 

A) The main factor which contributed to Nifty’s up move was the increase in FPI flows of over Rs 5,000 crores in the past nine trading sessions. This sudden inflow directly into the secondary markets after the lull of over 3 months was a big booster.

Positive news on stage 3 trials for the COVID-19 vaccine also kept the momentum of the market going. If this weren’t enough, the EU approved a stimulus package of $850 billion which retained the positive sentiment on D-Street.

Additionally, early corporate numbers also surprised estimates with banks reporting a decline in the percentage of accounts opting for a moratorium and IT companies delivering operational efficiency. This bout of good news from different corners led to aggressive buying in the equity markets.

Q) Nifty50 climbed 11,200 levels this but it is now approaching crucial resistance levels. What are the important levels which one should track in the coming week amid F&O expiry?

A) This is the sixth consecutive week when Nifty has closed the week in the green. The level of 11,240 would be an important resistance level to watch out for in the coming week.

The immediate support is placed at 11,000 and a break below 10,900 may lead to short-term weakness. It has also been observed that Bank Nifty which has been an all-weather partner has seen a fall in momentum.

The banking index has formed a bearish ‘Shooting Star’ pattern but managed to close on a mildly positive note. The divergence between Nifty and Bank Nifty is also going on for the last three weeks. It is advisable to maintain a cautiously bullish outlook on the Nifty going ahead.

Q) Small & midcaps underperform in the week gone by. Does it seem like investors prefer to book profits?

A) Reversion to mean is kind of a law of gravity in the stock market, through which returns mysteriously seem to be drawn to norms of one kind or another over time- John Bogle.

This could be one of the reasons for small and midcaps to have underperformed the benchmark indices. More so, retail turnover has increased to about 57 percent of the average cash volumes on the exchanges in the first quarter FY21 while daily deliveries have seen a dip.

This certainly shows that retail investors are more speculators than long term investors and their participation too could have caused this swing in prices in the mid and smallcaps.

Q) Sectorally, what seems to be driving the rally in the energy, banks as well as financial space?

A) Management commentaries from banking stalwarts on moratorium indeed sounded promising with a caveat that there could be a likely turnaround slowly.

However, the results declared by HDFC Bank and Axis Bank superficially seem decent but it certainly seemed to be hanging on the leeway provided by RBI which is delaying NPA classification due to the unprecedented situation.

Financial services have also witnessed people staying indoors transacting digitally to procure insurance policies for their loved ones.

The fact that more people are working from home is giving them time to trade and invest, which is working well for D-Street and driving the rally in certain stocks.

Q) Bulls pushed Gold price to hit fresh record highs. Is it too late to buy now? If not, what is the kind of percentage which one can hold in the portfolio?

A) Gold prices have hit a record high but investors shouldn’t short just yet. The stimulus packages announced by the US, Japan and EU have the potential to cause a big up move in commodities as well.

People are looking to diversify and in the process are inching towards gold and silver as an asset class which is driving the prices even higher.

Investors should not sell their holdings in these commodities as there is more potential for it to record higher highs. 5-10 percent of one’s portfolio can be allocated to gold for at least the next few years.

Q) Any top 3-5 trading ideas which investors could look at for the next 3-4 weeks?

A) Instead of commenting on stocks, I would describe a sector I am bullish on. The IT sector would be a good bet for the medium to long-term.

They have shown efficient cost reduction measures in the current quarter and the demand for orders will drive up margins going forward. The growth for IT stocks is also backed by the “new normal” of working from home and optimising supply chains to function digitally.

A need to strengthen cloud-based infrastructure will also drive up topline demand. In all, digital is the way forward and will be a theme to look out for in the coming months.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.