Exposure to small & midcaps should be 20% despite recent outperformance: Umesh Mehta

Sheer underperformance and the oversold state of small and midcap stocks have resulted in outperformance when the market, in general, bounced back from lower levels.

June 27, 2020 / 03:20 PM IST

Sheer underperformance and the oversold state of small and midcap stocks have resulted in outperformance when the market, in general, bounced back from lower levels, Umesh Mehta, Head of Research, Samco Securities, said in an interview with Moneycontrol’s Kshitij Anand.

Q) The week which started off on a strong note witnessed profit booking decline in the second half of the week. How would you describe the market action in the week gone by?

A) These are symptoms of exhaustion of a market rally. Indices have continuously rallied for the past 10 weeks now and risen by 38 percent from lows therefore it is but natural for the market to have intermittent corrections.

And going forward, there is a high probability that this correction will extend further given that June monthly expiry is behind us, and mostly short positions have been squared off. There is every likelihood that markets can drift lower in July expiry.

Q) June series saw both Sensex and Nifty rally over 8 percent each. Which are the important levels that one should track in the July series? Do you think we could reclaim 10,500 or bulls will fail to defend 10,000?

A) Crossing 10,550 would be a difficult task for the Nifty 50 given that 10550 is an important resistance level which is 61 percent retracement of the entire fall.


Also, maximum calls are placed at that strike price which means that 10500-10600 is a strong resistance zone from the near to medium-term. On the support side, 9700-9800 would be important levels to track in the July series.

Q) Small & Midcap stocks outperformed benchmarks in the June series and so far in the month as well. What is driving the rally in the broader market when most of the macro indicators remain muted?

A) Sheer underperformance and the oversold state of small and midcap stocks have resulted in outperformance when the market, in general, bounced back from lower levels.

Cash market stocks in mid and small-cap space have always outperformed the indices after a major correction in their prices. So this time is no different.

The small and midcaps that made a top in 2018 followed by 2-3 years of major price cuts are now experiencing outperformance.

However, long term investors should not get carried away by such outperformance and can have exposure to the extent of 20 percent in such small and midcap stocks with balance 80 percent in frontline large caps.

Q) The first 6 months which will get over next week produced three stocks in the BSE 500 index that rose over 100%. The list includes names like Adani Green, Suzlon Energy, and GMM Pfaudler. What is driving rally in those names? Or it is just a liquidity wave or there is something fundamental.

A) Mostly small-cap shares move in such fashion given their stock-specific events irrespective of what the general market does. These are all stock-specific stories and news based movements that happen all the time and no general conclusions should be drawn.

There will be stocks in the near future which can give over 100 percent performance depending on the kind of orders they get or specific company driven events like mergers, acquisitions or rights or preference issues.

Markets, therefore, respond accordingly. Case in point being Reliance Industries’ quest to become debt free and the whopping amount of Rs 1.68 lakh crore raised which was the biggest reason for its outperformance. Investors can watch out for such stock-specific events for making such large gains and there is no other way.

Q) More than 70 percent of the stocks in BSE500 gave negative returns in the last 6 months. 18 out of 376 stocks fell more than 50% that include names like IndusInd Bank, Future Retail, Repco Home, Lemon Tree, and Raymond. Are they opportunities in a bear market or one should avoid catching the falling knife?

A) In general, stocks that fall more than the general market movement are the ones who have more stock-specific risk and this is an unsystematic risk.

Investors should not take a larger component of unsystematic risk (stock-specific risk) to make returns rather they should mute expectations of return but at the same time invest in safer and stable businesses which can also be measured through the extent of fall in their stock prices.

Case in point, Kotak Mahindra Bank compared to other banks. Kotak fell 27 percent from its highs in Feb end/March while others have fallen as high as 50-80 percent - ICICI bank fell 57 percent, Axis bank around 80 percent.

For safer risk-adjusted returns one should invest in relatively stronger stocks and short sell relatively weaker stocks if one has to trade in the market.

Q) Your take on markets in the first six months? Opportunities for new investors but pain for the ones who are already invested? And what should be the strategy now to tackle the second half?

A) Safety of portfolio and steady returns are one of the most important criteria for making an investment portfolio both for a new and existing player.

Stocks that offer high dividend yields upwards of 6 percent and low debt with a good track record of 5 years can be a very good strategy to accumulate stocks irrespective of the 2nd wave, global trade wars, India-China disputes etc.

Such a composition of baskets will give above-average returns in 2-3yrs of time frame. In a falling interest rate scenario, getting dividend yields of 5-6 percent over a long period of time is certainly a great investment theme that may not come true every now and then.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Jun 27, 2020 03:20 pm

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