Markets

What is driving the midcap mayhem

The area around Sussex Industrial Estate in Mumbais Byculla is a maze. While it is close to four suburban railway stations and Gloria Church is a local landmark, finding an address in the lanes of this area can be a nightmare for both pedestrians and GPS-armed taxis.

However, stockbroker and investor Chirag Parekh prefers to base his office in this area instead of the upscale financial hubs of Mumbai. There is little traffic and ample parking space, says the director of Prarambh Securities, who had waded into securities trading because he thought brokers could work shorter hours. The brokerage that rubs shoulders with small industrial units has a proprietary book (using the organisations own capital) that boast of a daily turnover of Rs 400 crore.

It is clear he is comfortable navigating through a maze — be it the lanes of Byculla or the equity market. It is perhaps this trait that makes him see an opportunity to invest more in a market that is in an unusual phase — midcap and smallcap indices are plunging, while the benchmark indices have closed at their all-time highs. Though Parekh is not worried sick, thanks to the comfort of his proprietary book, he now asks clients to invest in mutual funds, which have access to better research, seen as the key to crack this puzzle. But not all investors have a capital cushion.

Across the country, Amitava Addy is losing his nerve to buy the dips — purchasing shares when its prices fall. The West Bengal-based paediatrician in a government hospital has been investing in equities in the past one year. What is perplexing him is that his mid-cap portfolio has lost 15% in six months even as the flagship indices are soaring.

A six-month comparative snapshot of the stock indices shows this divergence, which has the trading community puzzled. Between January 1 and now, the Nifty, the flagship index of the National Stock Exchange, has moved up 8%. On the other hand, the Nifty Midcap 50 has fallen 10% and the Nifty Smallcap 50 has declined 21%. This divergence between the largecap index and the mid and smallcap indices is a first in recent memory for Indian bourses.

Subhadip Nandy, who trades stocks on the basis of quantitative analysis, pointed out this divergence a week ago through a series of tweets. He called it a “de-coupling” of the indices and a “flight to safety”, as investors, mostly mutual funds and institutions, exited midcaps and smallcaps for the relative security of larger companies.

midcap-2

The meltdown has, however, left smaller investors in the lurch, unable or unwilling to stomach the loss. The margins of leveraged day traders are under pressure. Only a few, like Parekh, are in a position to keep on investing at low prices.

Some investors like Mumbaibased communications professional Ajay Aswani are seeing their financial strategies go awry, at least in the short term. Aswani, who is expecting a baby in October, has 80% of his investments in equities. Of this, 70% are in midcaps. He was planning to sell some of his equity holdings later this year to meet the expenses of the newborn. Now with his midcap portfolio down by 15%, Aswani is not keen to sell at a loss. He will have to find other investments to cash out.

midcap-3

The recent fall follows a build-up of epic proportions in small and midcaps in 2016 and 2017, when investors such as Addy pumped in money. After demonetisation, a lot of new money entered the equities market. Buoyed by the cash pile, many midcap shares have traded at 30-60 times their earnings over the past two years. Some prominent investors saw value in picking up certain mid and smallcap stocks. These investors also developed a large following. One such maven, Porinju Veliyath, whose portfolio management service handles Rs 1,500 crore, even suggested that investors can back midcap companies with dicey corporate governance as these companies would eventually aim for better governance parameters, further improving the intrinsic value of the scrips.

The buzz in stocks of small companies was widespread. “Wherever I went, from Chandigarh to Kolkata, people were talking about midcap stocks,” says Ashish Gumashta, India CEO of Swiss wealth management firm Julius Baer. In a market like this, which is ripe for a correction, there are several developments that can become a trigger for price correction, Gumashta says.

And the triggers came tumbling. Some experts say macroeconomic issues such as rising crude oil price, fall in rupee and hardening interest rates were the reasons for the fall. Others blame a regulatory action of October 2017. The Securities and Exchange Bureau of India (Sebi) had ordered mutual fund houses to consolidate their schemes under five categories, in an attempt to streamline the market for investors. The midcap space was clearly defined. This forced mutual funds to churn their portfolios, leading to a selloff in midcap stocks.

The Union Budget bringing in the long-term capital gains tax on February 1, 2018, was also a dampener. In June, Sebi introduced additional surveillance measures on stocks.

There was bad news on the corporate governance front, too. Companies announced share buybacks but withdrew the offers after the prices of the scrips moved up. News of auditor resignations midway through the audits of some midcap companies added to the market mayhem.

midcap-5
midcap-6

“The mid and smallcap rally between 2016 and 2017 led to massive overpricing of stocks. Several of these corrected deep when macroeconomic indicators turned adverse. Prices are still ranging above historical averages. Corporate earnings have still not recovered to support such high price-levels,” says Harsha Upadhyaya, CIO-equity, Kotak Mutual Fund.

Chennai-based Anil Kumar Goel, a widely followed value investor, says he has stopped trading. “There are more punters and fewer investors in the market today. There is no point exiting a good stock at a loss.”

Mumbai-based insurance industry professional Samir Sawant, an investor in equity markets for a decade now, has also stopped trading. After investing in midcaps for three years, he has seen his portfolio dive 50%. “I used to follow Porinju and his investments. But now I have stopped.”

The broking community is not happy with Sebi, and feels it could have helped build awareness in this phase. Rajesh Baheti, president, Association of National Exchange Members of India, says many measures introduced by the regulator were more focused on preventing tax evasion and less on market regulation. Investors should now shun exotic stocks and play the “straight and narrow” game if they want to reach safe shores, Baheti says.

midcap-7

The owner of a small travel business in Mumbai, P Rajesh, had entered the equities market in search of excitement and extra money. But he is now keen to play with a straight bat. His basic needs are provided for through inheritance. “I have seen the worst of 2009 and 2013. I will hold on.”

This is something Mumbai-based investor J Verghese, 83, also wants to do. About three years ago, he had taken an investing course from Motilal Oswal. With a little more than `4 crore, the proceeds of sale of a plot of land, he built a portfolio in equities. In the past six months, his portfolio has shrunk by Rs 80-90 lakh. But Verghese is willing to wait it out, though his family wants him to shift to fixed income instruments.

The wait is likely to be long. K Sandeep Nayak, CEO of Centrum Broking, says the general elections in 2019 have now become a marker for recovery of the markets.

“The investment horizon just got elongated by two to three years,” he adds.

Original Article

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *