Vijay Kumar Gaba

1.    The benchmark Nifty50 has gained ~6.5% from the end of FY23; and the broader market indices like Nifty Midcap100 (~12%) and Nifty Smallcap 100 (~13%) have done significantly well during this period, indicating much improved sentiments. This view would imply that presently the sentiment of greed is dominating the sentiment of fear.

2.    At the current level, Nifty50, Nifty Midcap100 are close to their all time high levels recorded in the 4Q2021 and again in 4Q2022. Whereas Nifty Smallcap100 is still about 20% lower from it’s all time high level seen in early 2022. So effectively the markets have been oscillating in a wider range after the sharp rally post March 2020 Covid panic lows. This view would imply that since the market is now close to the upper bound of its trading range, traders would be looking to pare their long positions; especially because most of the good news (rate and inflation peaking; earnings upgrades; financial stability; etc.) is already well known & exploited; while the fragility in global economy and markets has increased and hence the present risk-reward ratio for traders may be adverse.

3.    From a historical relative valuation perspective – Nifty is currently trading at ~3% premium to its 10yr average one year forward PE ratio. The same premium for Nifty Midcap100 is 14%; while Nifty Smallcap100 is trading at ~2% discount to its 10yr average one year forward PE ratio. The discount of smallcap PE ratio to Nifty PE ratio is presently close to 22%, larger than the 10yr average of 16.5%. The sharp outperformance of smallcap may be a consequence of value hunting rather than greed; and the traders may soon return to Nifty as the valuation gap is filled.

Whatever view one takes, in my opinion, it would make sense to take some money off the table, especially from broader markets and high beta.