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Informist, Thursday, Sep 19, 2024

By Anshul Choudhary

MUMBAI – Mid-cap and small-cap stocks may decline on Friday as investors may book profits, as the highly anticipated interest cut by the US Federal Reserve has come about, analysts said. Further, a cut of 50 basis points, rather than 25 bps, has resulted in concerns that the Fed may have done it considering the risk of slowdown in the US economy.

"The 50 bps cut raises questions if the Fed is worried about some kind of stress which may not be visible in data just yet," Teresa John, economist at Nirmal Bang Institutional Equities, said. Other economists also expressed nervousness over the larger rate cut, with economists at Nomura mentioning in a note, "He (Fed Chair Jerome Powell) did not offer a consistent explanation for why the Fed cut 50bp today or what the threshold will be for future 50bp moves."

Above this, small-caps and mid-caps are faced with a major risk of profit booking due to their expensive valuations, with several analysts pointing to exuberance in sectors such as defence, railways, industrials, among others. Analysts cautioned that some stock prices suggest investors have discounted earnings for more than two to three years, raising their valuations to extreme levels.

The Nifty Smallcap 250 has risen over 30% this year after gaining 48% in 2023. The Nifty Midcap 150 has risen nearly 29% this year after gaining over 43% in 2023. Today, broader market indices ended lower despite the larger-than-expected rate cut in the US. The mid-cap indices ended 0.5-0.7% lower and small-cap indices closed 1.1-1.3% down.

Nuvama Institutional Equities technical desk advised investors to exercise caution in the broader market. "There are early signs that the broader markets are experiencing a lack of momentum and decline in breadth reading across the board after a strong rally," Nuvama said in a note today.

The brokerage said that broader market indices may fall 5-10% if the Nifty Midcap 100 closes below 58000 points--over 2% lower than today's close--and the Nifty Smallcap 100 closes below 19000 points--nearly 1% lower than today's close.

Analysts are relatively comfortable advising large-caps as these are available at fair valuations compared to their counterparts in small-caps and mid-caps. However, with the Fed's September meeting done, several analysts said investors may "sell on news" considering indices had gained in anticipation of the meeting. The Nifty 50 has risen nearly 17% so far this year.

Some caution was visible today despite the 50 bps rate cut. The Nifty 50 saw sharp profit booking after rising to a lifetime high of 25611.95 points and ended nearly 200 points lower than the highest level. The 50-stock index closed at 25415.80 points, rising a mere 0.2% from Wednesday's close.

Going forward, the Nifty 50 is expected to find support at 25300 level, followed by 25000 points. "I expect major profit booking as the major event is behind us now...index (Nifty 50) can fall below 24800 by the end of this month," said Mehul Kothari, assistant vice-president of technical research at Anand Rathi Shares and Stock Brokers.

However, there were a few analysts who acknowledged the risk of profit booking but also expected sentiment to be positive till the support levels above 25000 levels are intact. "There isn't any sign of major weakness and the index (Nifty 50) may rise again after 3-4 days of fall, but significant rise is only possible after it closes above 25500," Om Mehra, technical analyst at SAMCO Securities said. After the index witnessed profit booking at higher levels, analysts said the resistance level of 25500 points remains intact for the coming sessions.  End

Edited by Aditya Sakorkar

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