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Vicious correction in small and midcaps: Why these 'gems' have taken a hit

Every small cap is indiscriminately avoided as a hidden worm. No better time for selective stock picking and accumulation especially in the small and midcaps, says ArunaGiri N of TrustLine Holdings.

September 30, 2018 / 02:41 PM IST

Aruna Giri N

Last few trading sessions have been brutal for the market, especially for  small and midcaps. Calling it a meltdown could be an understatement. If anyone thought it was a perfect storm for small and midcaps in July/early August, when a confluence of negative factors like mutual fund rationalization, ASM (additional surveillance measures), PMS (portfolio management services) selling, EM (emerging market) outflows, and rupee fall, among others, came together, sadly they didn’t know that worse was lined up in September.

Rewinding to July, the market had a a similar scare environment and it punished a lot of stocks in the broader space, leaving few places for hiding for investors. Back then, large-caps were spared and the damage was limited to small and midcap space.

But, in the current one, participants couldn’t hope for such a selective slump. Damage has been inflicted across the board, barring IT and pharmaceuticals.

Even high-quality financials, where people could hide in the earlier fall, weren’t left out. NBFCs (Non-banking financial companies), the erstwhile haloed sector, took the worst hit.

As if the heart-burns from crude and rupee were not enough, IL&FS debacle descended from nowhere to conspire a deadly blow to the markets.

The Reserve Bank of India's (RBI) refusal to give an extension to Yes Bank’s CMD couldn’t have been more ill-timed. When credit markets at the short-end froze due to some fund houses' attempt to desperately clear short-term papers (CPs) to meet the redemption pressure in their liquid funds (on fears of their exposure to ill-fated IL&FS), hell broke loose and set off a vicious slide in stocks across the board.

Credit markets may look sophisticated. But, at the end of the day, it’s most vital component is also most ephemeral i.e. trust and confidence. When trust erodes, system freezes up. When such things happen, simple liquidity issues can lead to solvency issues.

Fears of such an outrageous outcome (driven partly by rumors by vested interests of course) took a ferocious proportion to inflict a serious dent to confidence in the equity markets.

Traders with big losses in stock futures and options had to resort to indiscriminate selling in the broader cash markets (even quality names in and beyond small and midcaps) to cover the margin calls.

This led to panic in the small and midcaps with stocks crashing by 30 to 40 percent in a few trading sessions. Normally, such indiscriminate selling happens during the last leg in the so-called “capitulation” phase post which market usually finds a bottom.

If what happened this week is not capitulation, one would dread to think what will it be? Assuming this is capitulation, with weaker hands completely out, one can now sigh a relief that we are closer to the bottom, if not bottom itself.

So much has changed in one year. Last year, every small cap was sensationalized as hidden gem irrespective of the underlying quality. In stark reversal now, every small cap is indiscriminately avoided as a hidden worm.

Seasoned investors know that this is precisely when the opportunities arise multifold. No better time for selective stock picking and accumulation especially in the small and midcaps.

Happy Value Investing!!

Disclaimer: The author is Founder CEO & Fund Manager, TrustLine Holdings Pvt Ltd. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Moneycontrol Contributor
Moneycontrol Contributor
first published: Sep 29, 2018 02:09 pm