Profit booking in mid and smallcaps reflecting worries about stretched valuations

Mumbai: The domestic market exhibited a smart recovery in the second half on Wednesday, reversing initial losses as buying picked up in largecap stocks, said Vinod Nair, Head of Research at Geojit Financial Services.

Nevertheless, the broader index continued to underperform with profit booking in mid and smallcaps reflecting worries about stretched valuations, Nair said.

The Nifty 50 closed at 22,474.05 on Wednesday, up 118 points, or 0.53 per cent, while the Sensex settled at 74,085.99, up 409 points, or 0.55 per cent, both settling at their fresh closing peaks.

The global markets witnessed mixed signals ahead of the US Fed Chair Jerome Powell's congressional testimony. While it's widely expected that the Fed Chair may downplay the urgency for rate hikes, the possibility of hints regarding a potential rate cut trajectory cannot be dismissed.

Investors are banking on recent FOMC minutes, suggesting the policy rate may have peaked and higher rates could hinder growth, Nair said.

Jaykrishna Gandhi, Head of Business Development & Institutional Equities at Emkay Global Financial Services, said that for the Indian markets, one can expect the volatility to continue, with mid/smallcap seeing some selling pressure with frontline stocks holding the fort in the immediate term.

Last week, SEBI’s concerns mounted with flows into small/midcap funds. AMFI has asked the mutual funds to make more disclosures on these schemes and put in place a policy to protect investors' interests in 21 days.

For IT services companies, weak discretionary spending, slower decision-making, and revenue conversion amid an uncertain macro environment are leading to revenue softness in this quarter as well, with an uncertain recovery timeline.

The commentary is broadly in line with the Indian IT companies, he said.