B1 & B2 groups, comprising mainly mid and small-cap stocks, attracting investors’ fancy of late is not news. But the fact that they are closing in on A-group stocks in terms of trading volume on the BSE is. A look into the trading pattern of A, B1 and B2 group stocks reveals that the focus is slowly but surely turning towards the latter, as close to 50 per cent of the trading is happening in non A-group stocks. Data pertaining to 2003, 2004 and mid-2005 shows that the A-group stocks had accounted for an average of 85 per cent of the total trading on the BSE.

But the trend is fast disappearing as the data since 2005 shows that B1 and B2 stocks have been accounting for an average of 41 per cent, rising from just 15 per cent pre-2005.

Despite recent recovery and lot of activity in B1 and B2 group, only one-fourth of the stocks were able to surpass the highs that they had hit during the 2006 bull rally. Of about 2,850 stocks that are trading on the BSE, around 2,150 stocks are still trading far below their 52-week highs that they had touched during 2006. Marketmen attribute this to the following factors: Trading volume increased during this period and mid/small-cap space has attracted almost all the higher inflow into the system; lot of mutual funds have been focussing on these stocks.

According to Mr T.S. Harihar, Vice-President, Equity Derivatives, Karvy Stock Broking, the rally from 8,800 in June 2006 till the Sensex level of 14,000 in March 2007 was largely driven by the large caps. “Obviously, with most frontline stocks in sectors such as telecom, capital goods, banking and technology richly valued, the margin of safety was very limited which possibly explains the shift in interest to large caps as these are less vulnerable to business cycles,” he said.

According to Mr P.B. Subramaniyan, Executive Director, Apollo Sindhoori Capital Investment, low P/E of small-cap stocks seemed to have turned attractive compared with A-group stocks. “Although the non-A category stocks have outperformed the A-category stocks during the last one year, the former are still trading at lower P/E of 17.35 compared with Sensex and mid-cap index,” he said.

“Mutual funds are launching more of mid-cap and small-cap schemes creating more awareness about small and mid-cap counters,” Mr Subramaniyan added.

As the market has become more volatile in the last few days, trading is getting centred in A-group stocks. Last week data reveals that the non-A group stocks account for 37 per cent of the trading volume. This also signifies that trading volume takes a knock when the market is volatile, thus, affecting trading activity in B1 and B2 group stocks.
F&O leverage

Another reason is expansion of F&O space. With leverage position now possible for more number of stocks, traders take active positions on these stocks. “Many quality mid-cap stocks are also available in the F&O segment. In the past, investors in mid-cap stocks had no respite in the event of a sharp fall in prices. With the introduction of futures, investors can hedge their downside risks effectively without having to indulge in a distress sale of their mid-cap holdings,” Mr Harihar said.