INSUBCONTINENT EXCLUSIVE:
And retail investors are struggling to understand what is wrong with them and whether they should hold on or book losses
Fundamental and technical analysts ETMarkets.com spoke to say not one but multiple factors are weighing on the smallcap stocks
forth in valuations amid earnings disappointment has also hurt prospects of this basket of stocks after a secular run spanning several
months.
On the technical charts, the bullish years-long trend in the BSE Smallcap index seems to have reversed, and it looks like there is
What should investors do
Fundamental or technical selloffIn a bull market, it takes no time for smallcaps to first catch up with largecaps,
and then rally fast to lofty valuations
investors take no time to move out, leaving small investors trapped.
This time is no different, say analysts
The only problem is, the portfolio realignment by mutual funds happened simultaneously, intensifying the pain.
Portfolio re-alignment by
mutual funds is indeed one reason, but valuations for many of the midcap and smallcap stocks were running ahead of time for last few
was down 19.80 per cent from its 52-week high of 20183.45 hit on January 15, suggesting that the index was just 20 basis points way from
smart and nimble have already moved out of smallcaps.
From the 860-odd BSE Smallcap index pack, the median decline from their 52-week highs
About 80 per cent of the constituents have fallen more than the index from their respective 52-week highs, said Nitasha Shankar, Senior
As such, it becomes important for one to have the stomach to invest in the same as sharp price movements are part and parcel of investing in
Leave out the Rs 1 lakh crore worth of IPOs, the erosion in market valuation so far this year would be nearly Rs 14 lakh crore, or 15 per
But the BSE Sensex is down just 4 per cent, suggesting that the pressure has been mainly on the second-rung stocks
Technical picture bleakThe daily chart of Nifty Smallcap index has breached its major Double Bottom support just below the 7,500 mark
Though the index remains in the oversold territory and some technical pullback can be expected, it remains in a secular downtrend since the
beginning of 2018, said Milan Vaishnav, Consultant Technical Analyst at Gemstone Equity Research Advisory Services.
On the weekly chart,
the smallcap index tested its high near the 9,500 mark
At that point, the index remained in a two-year-long primary uptrend
The first quarter of 2018 saw a corrective retracement
The index slipped below the 8,000 mark, but pulled back again
uptrend, Vaishnav said.
He feels that the trend has reversed as of now, and no significant upmove is likely unless the index moves past the
Until that happens, all pullbacks will remain susceptible to selling pressure at higher levels.
What should investors doShankar says it
becomes imperative for investors in times like this to relook at the stocks they hold.
For companies that they have invested in from a
long-term perspective, it would make sense to go back and see whether their original thesis still stands
If so, making the most of the decline in stock would make sense
But if the investment was speculative in nature and was done based more for speculative purpose, one should simply move out of the stock,
she said.
G Chokkalingam divided smallcaps into three categories: one where valuations are too high and companies have failed to live up to
the mark in terms of earnings; second, where there are concerns over transparency in management decisions and where fundamentals are
Investing in midcap and smallcap stocks has mainly been a bottoms-up approach, particularly in the Indian context
From that perspective, the recent selloff can actually give decent opportunities for long-term investors
Albeit, one needs to be very selective and do thorough homework on the business outlook, management quality (integrity and capability),
inherent profitability (cash flow and ROCE-ROE) and be sure that valuations are reasonable even after the recent price corrections, said
Shah of Emkay Global.
Chokkalingam added that there could be stocks that have seen a 30 per cent drop because their consolidated debt is too
huge to sustain, and there would be others which may have fallen even when a company's cash-to-mcap ratio remains quite high
A re-think on every portfolio is a must at this point, he advised.
