research.pacefin
9th January 2009, 02:56 PM
CNX MIDCAP & NIFTY INDEX
It has been observed that the relative performance of the midcaps vis a vis large caps keeps changing between the various stages of the bull and the bear market. Mid caps tend to outperform the large caps as the bull market matures and is usually close to its historical high at the peak of the bull market. Once the bull market peaks out, midcaps tend to start underperforming the large caps. This underperformance is the most severe at the end of the bear phase & the pre-bull market phase. And this underperformance lasts for a long period of time.
The reasons are not far to seek. When times are tough it is only the largest players who are also the industry leaders that are able to perform well as they continue to enjoy the economies of scale even in a tough environment. Smaller players are disadvantaged because they fail to reach the critical mass. This severely restricts their ability to attract the cheap capital and quality manpower. In boom times this situation is reversed as the smaller players reach the critical mass, in fact thanks to smaller base effect they are able to show the much higher percent increase in their top line and bottom line.
We decided to do an in-depth study of the relative performance of the midcaps vis a vis large caps over the 8 years in order to verify the above logic. We took the NIFTY 50 as the representative index for large caps and CNX Midcap for the midcap scrips. We also wanted to throw more light on the historical ratio between the two at various points of times in this period to extrapolate the findings and to project the likely ratios and levels for the CNX Midcaps in the times to come.
CNX Midcap Vs Nifty: The Ratio Analysis
At the time of making this report (Closing of January 6, 2008); NIFTY closed at 3113 while the CNX MIDCAP stood at 3921. Ratio of CNX Midcap to NIFTY is currently at 1.26.
The ratio started moving up around November 2003 and stayed in the territory of 1.22 1.53 till December 2007. At the start of the year 2008, (Syncing with the start of bear market) it started falling off from 1.52 and has shown a continuous downward trend since then.
The various statistical figures for this ratio stand as follows:
1) High 1.54 (September, 2005) & 1.535 (December, 2007)
2) Low 0.69 (October, 2001)
3) Pre-Bull Phase Average 0.85
4) Bull Phase Average 1.33
5) 8-year Average - 1.19
Above statistics clearly suggests that CNX Midcap has underperformed the Nifty Index during the Bear & Pre-Bull phases. Midcaps started outperforming the Nifty as the market approached the bull market maturity. Traders, in such a situation become less & less risk averse and thus, the ratio touched its all time high around 1.54, in the month of December 2007, just before the Bear market started.
Our analysis suggests that we might not have still seen the bottom, and since currently Midcaps are overvalued comparative to the broader Nifty Index at the current ratio of 1.26; we feel there is a lot of downside still remaining in the Midcaps. Currently the ratio is significantly higher than the Pre Bull period average of 0.85.
We expect the main Nifty index to outperform the CNX Midcap index. The most conservative target is in the sub 1 region, as seen in the bear & pre bull market phase, depicted by the period starting 2001 to 2003.
Recommendation
As we expect the Nifty to reach the levels of 1500-2000 by April08; we expect the CNX Midcap to reach in the range of 1275-1500 as the ratio of CNX Midcap to Nifty Index is expected to reach around 0.85.
We recommend shorting the CNX Midcap at current levels. One may also take this as a pseudo bet on index constituents of CNX Midcap; which may underperform the markets in the long term.
__________________________________________________ _______________
PACE Financial Services
Head Office A1/ 291, Safdarjung Enclave, New Delhi 110029
Telephone 91-11-42022222 (50 lines), 26106371
Fax 91-11-26165176
Web site www.pacefin.com
__________________________________________________ __________________________________________________ ______________________________PACE RESEARCH
Pushkaraj Kanitkar Chief Technical Analyst pushkan@pacefin.in
Head, Research & Strategy
Gopal Krishna Varshney Fundamental Research Analyst gopal.varshney@pacefin.in
Yadvendra Mohan Database Management yadvendra@pacefin.in
__________________________________________________ _______________Disclaimer
The Research Department of PACE Financial Services has prepared this report. The information and opinions contained herein have been compiled or arrived at based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. PACE, its owners, directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Investors should invest only in consultation with their financial adviser.
PACE and other group companies, its owners, directors, analysts, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies /organizations described in this report.
General Advice Warning
Please note that any advice given by PACE is deemed to be general advise, as the information or advice given, does not take into account your particular objectives, financial situation or news. Therefore, at all times you should consider the appropriateness of the advice and consult your financial advisor before you act further.
It has been observed that the relative performance of the midcaps vis a vis large caps keeps changing between the various stages of the bull and the bear market. Mid caps tend to outperform the large caps as the bull market matures and is usually close to its historical high at the peak of the bull market. Once the bull market peaks out, midcaps tend to start underperforming the large caps. This underperformance is the most severe at the end of the bear phase & the pre-bull market phase. And this underperformance lasts for a long period of time.
The reasons are not far to seek. When times are tough it is only the largest players who are also the industry leaders that are able to perform well as they continue to enjoy the economies of scale even in a tough environment. Smaller players are disadvantaged because they fail to reach the critical mass. This severely restricts their ability to attract the cheap capital and quality manpower. In boom times this situation is reversed as the smaller players reach the critical mass, in fact thanks to smaller base effect they are able to show the much higher percent increase in their top line and bottom line.
We decided to do an in-depth study of the relative performance of the midcaps vis a vis large caps over the 8 years in order to verify the above logic. We took the NIFTY 50 as the representative index for large caps and CNX Midcap for the midcap scrips. We also wanted to throw more light on the historical ratio between the two at various points of times in this period to extrapolate the findings and to project the likely ratios and levels for the CNX Midcaps in the times to come.
CNX Midcap Vs Nifty: The Ratio Analysis
At the time of making this report (Closing of January 6, 2008); NIFTY closed at 3113 while the CNX MIDCAP stood at 3921. Ratio of CNX Midcap to NIFTY is currently at 1.26.
The ratio started moving up around November 2003 and stayed in the territory of 1.22 1.53 till December 2007. At the start of the year 2008, (Syncing with the start of bear market) it started falling off from 1.52 and has shown a continuous downward trend since then.
The various statistical figures for this ratio stand as follows:
1) High 1.54 (September, 2005) & 1.535 (December, 2007)
2) Low 0.69 (October, 2001)
3) Pre-Bull Phase Average 0.85
4) Bull Phase Average 1.33
5) 8-year Average - 1.19
Above statistics clearly suggests that CNX Midcap has underperformed the Nifty Index during the Bear & Pre-Bull phases. Midcaps started outperforming the Nifty as the market approached the bull market maturity. Traders, in such a situation become less & less risk averse and thus, the ratio touched its all time high around 1.54, in the month of December 2007, just before the Bear market started.
Our analysis suggests that we might not have still seen the bottom, and since currently Midcaps are overvalued comparative to the broader Nifty Index at the current ratio of 1.26; we feel there is a lot of downside still remaining in the Midcaps. Currently the ratio is significantly higher than the Pre Bull period average of 0.85.
We expect the main Nifty index to outperform the CNX Midcap index. The most conservative target is in the sub 1 region, as seen in the bear & pre bull market phase, depicted by the period starting 2001 to 2003.
Recommendation
As we expect the Nifty to reach the levels of 1500-2000 by April08; we expect the CNX Midcap to reach in the range of 1275-1500 as the ratio of CNX Midcap to Nifty Index is expected to reach around 0.85.
We recommend shorting the CNX Midcap at current levels. One may also take this as a pseudo bet on index constituents of CNX Midcap; which may underperform the markets in the long term.
__________________________________________________ _______________
PACE Financial Services
Head Office A1/ 291, Safdarjung Enclave, New Delhi 110029
Telephone 91-11-42022222 (50 lines), 26106371
Fax 91-11-26165176
Web site www.pacefin.com
__________________________________________________ __________________________________________________ ______________________________PACE RESEARCH
Pushkaraj Kanitkar Chief Technical Analyst pushkan@pacefin.in
Head, Research & Strategy
Gopal Krishna Varshney Fundamental Research Analyst gopal.varshney@pacefin.in
Yadvendra Mohan Database Management yadvendra@pacefin.in
__________________________________________________ _______________Disclaimer
The Research Department of PACE Financial Services has prepared this report. The information and opinions contained herein have been compiled or arrived at based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. PACE, its owners, directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Investors should invest only in consultation with their financial adviser.
PACE and other group companies, its owners, directors, analysts, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies /organizations described in this report.
General Advice Warning
Please note that any advice given by PACE is deemed to be general advise, as the information or advice given, does not take into account your particular objectives, financial situation or news. Therefore, at all times you should consider the appropriateness of the advice and consult your financial advisor before you act further.