The stock market has been prone to mood swings, but then looking solely at the Sensex can give an incomplete picture.

For some time now, mid- and small-cap companies have not been running as fast as their bigger counterparts even when their profits are soaring at a faster clip. In the last one year, the large-cap Sensex gained a solid 96 per cent while the BSE Mid-Cap and Small-Cap indices lagged behind, increasing by about 85 per cent.

But today, the indices sang a different tune. After trailing for almost a year, mid- and small-cap companies outperformed the broader stock market. Mid- and Small-Cap indices of the Bombay Stock Exchange ended on a surprisingly positive note and surged 45.1 and 91.1 points, respectively. The Sensex, in contrast, went into a tailspin and lost 115 points, down to 11,915 points.

Profit growth of mid- and small-cap companies have been rising faster than the Sensex. In the first nine months of FY 2006, profits growth in mid- and small-cap stocks were up 36 and 39 per cent, respectively, as compared to just 26 per cent of the Sensex. This year, a similar profits story is likely to pan out. Yet, these companies are under-performing the Sensex on a relative basis.

Among the reasons for being out of favour are foreign investors. Big investors are compelled to buy only large cap companies as these stocks are actively traded in the market and which they can pick up or sell large quantities of shares without disturbing the market flow. Says Satish Menon, COO, Geojit Financial Services: ‘‘Large investors prefer companies which are well-researched with plenty of information flow. If only valuations get saturated here then they could come down to the smaller companies.’’

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