Nirali Shah, Head of Equity Research, Samco Securities, said that the broader market had experienced a near-vertical rally in a short span of time, therefore, a correction was overdue.
In an interview to Moneycontrol’s Kshitij Anand, Shah said both Nifty Smallcap 50 and Midcap50 have fallen to their 50 EMA in 6 trading sessions and the swiftness of the up move and the down move only prove that investors must invest in the broader indices after sufficient research and not fall prey to FOMO (fear of missing out). Edited excerpts:
Q) What is leading to a sell-off in the small & midcaps space for the past 2 trading sessions?
A) BSE Mid and Small cap indices nearly doubled and tripled, respectively, since March last year, but the tables turned on August 9 when BSE announced additional surveillance measures which would cap the price movement of stocks, a move termed as draconian by most brokers.
It marked the first time in 17-months that the mid and small caps underperformed the benchmark index. While this announcement definitely acted as a catalyst in this rapid selloff, there was one other factor that was looming in the backdrop that added to this profit booking.
Broader markets had experienced a near-vertical rally in a short span of time, therefore, a correction was overdue.
Both Nifty Smallcap 50 and Midcap50 have fallen to their 50 EMA in 6 trading sessions and the swiftness of the up move and the down move only proves that investors must invest in the broader indices after sufficient research and not fall prey to FOMO (fear of missing out).
Q) What should be the strategy of investors with respect to the small & midcaps space?
A) Keeping in mind a quote by Warren Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.”, we believe it is an opportunistic time to accumulate fundamentally strong stocks which are still fairly valued and have been an unfortunate casualty of this bear attack.
A company shouldn’t solely be judged by its Market cap but on various other factors such as its balance sheet strength, competitive advantage, returns on capital employed over the cost of capital, leadership position in a niche space etc.
Therefore, if investors come across such gems even in the broader markets they must definitely continue to invest, at least as long as this growth is backed by earnings.
Q) After a sharp rally (almost vertical move) seen in the small & midcaps, smart money has started moving towards the IPOs or largecaps? What are your views?
A) The current general rush seems to be towards asset classes that make the highest returns, be it smart or simple money. The flow of money is definitely tilted towards equities in that aspect.
Mid and small caps were the primary beneficiaries of the past year because they were undervalued and are expected to outperform in a bull cycle.
IPOs too get a lot of traction when the economy is ripe with liquidity and private players or promoters look for an exit, sometimes at unreasonable valuations.
However, what truly matters in the long term is earnings growth and returns on the capital employed which keeps a company’s compounding going, irrespective of its current size or scale.
A small player will become big and big will become bigger but at any stage investors must run behind growth rather than trying to chase speculation.
Q) Any small & midcaps worth looking at after the recent selloff and why?
A) There are a couple of names from the FMCG space which are worth looking at the post this recent sell off. FMCG as a theme is expected to play out going forward as health and hygiene, along with in-home consumption continues to gain momentum.
D2C (Direct-to-Consumer) is a powerful upcoming trend that will aid companies to cater directly to the end consumers’ needs by curtailing middlemen and expenses.
This will enable a margin boost and encourage growth especially with e-commerce having a stronghold on the millennial mindset.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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