This has happened in whole last week because of continuous “fall in midcaps and small caps”. The mid and smallcap mutual fund categories have returned exceptionally in the past one year. Midcap schemes returned 38.49 per cent and smallcaps offered 50.62 per cent in the last one year.
Small/mid-caps collapse post Uday Kotak’s bubble warning
On 16-Jan2018,Tuesday saw panic selling in small- and mid-cap stocks on the back of warning by one of India’s richest bankers, Uday Kotak, of building of a stock market bubble. The BSE mid-cap index fell 1.74 per cent and the small-cap crashed 2.24 per cent, which is the most in over three months. Several stocks in both the indices crashed by 7-15 per cent. Key benchmark index Sensex was down 0.21 per cent while the broader index Nifty fell 0.38 per cent.
Kotak, Vice-Chairman, Kotak Mahindra Bank, in an interview to a newspaper expressed concerns over the surging stock market and India’s financial savings going into selective stocks. Kotak group is one of the pioneers of stock market funding and a key player who had a large number of foreign portfolio investors registered as clients.
“Money is coming to a broad funnel and it’s going into a narrow pipe where massive amount of Indian savers’ money is now going into a few hundred stocks,” Kotak told the interviewer. “And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small- and mid-cap stocks is something on which we have to ask tough questions. You’re pushing all this (money) into a narrow funnel which inevitably runs the risk of a bubble,” said Uday Kotak.
“Kotak’s comments are being taken as a signal by the bulls that stock prices could be in the final leg of a melt-up,” said a head of foreign equity research desk in Mumbai.
The price to earnings (PE) multiple, a key measure of valuations in the current times, of the BSE Small-cap index stood at 129 while that for BSE Mid-cap index stood at 50. The PE for both the indices is higher than in the tech bubble of year 2000 and financial crisis of 2008. Then, it was mainly the leveraged margin funding bets that saw the markets crash.
Kotak also headed a SEBI committee which submitted a report last year on changes in corporate governance rules for listed firms. Talking on the same, he said, “Keep in mind now you have EPFO money, insurance money, pension, investors’ and savers’ money... People think nothing can go wrong. Micro (economic fundamentals) is improving but the speed at which stock prices are going up is even faster… The speed at which stock prices are going up is sheer money power,” he said.
So, Why is this happening?
Fundamentally the valuations are high and prediction of a fall after a prolonged rally are some of the reasons. But the recent fall in mid and small cap is mainly attributed to the announcement by SEBI.
There was an order by SEBI(Securities and Exchange Board of India) for consolidation of various schemes provided by the mutual funds.
And also Sebi specified some rules to define large caps, mid caps and small caps.
Due to this restructuring, all the major mutual funds have to buy more of large cap funds and sell their small caps and mid caps to make the scheme compatible with sebi norms.
They have a time period upto march 2018.
So they will keep buying large caps and keep selling mid n small caps.
So overall the market may look positive but we will have negative impact on portfolios.
Suggestion:
Technical correction is getting over in sectors like metals, small cap and midcap. Use next good rally to exit overbought stocks. Next technical dips can be deeper with any bad news. You can add fresh stocks there. Stay bullish on Indian Stock market as a whole.
Market returns and good return probabilities are higher while the markets are at their new highs than the returns and high return probabilities at market lows.
3 months back the NIFTY was said to be costly and was at its high. The returns of the portfolio is above the market returns in the last 3 months.
Enter quality stocks, buy on dips, have a good stoploss and beat the market returns.
“Existing investors” should not worry about the volatility in the space. Such correction will come and go but there is no trigger for a big fall in the mid and smallcap space. “New investors” are better off in multicap schemes as the valuations in the small and midcaps are becoming too high.
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