Market mind: A pursa for mid-cap investors

There is a term in India — pursa — which relates to condolence when someone dear has passed away.

This is my pursa — a collection of random thoughts without knowing really what to say — following the demise of the mid-cap and small-cap spirit last week.
 

One, there comes a time in life when even the arrogant among us turn to the Maker; this is it.

Two, the kind of collapse one has seen is unprecedented: one segment of the market has declined sharply while the other segment has largely resisted, which is unlike previous occasions when meltdowns were democratic.

Three, during the course of the last year when value pickers hibernated on the grounds that value stocks had disappeared, we prayed for a time when value stocks would be aplenty. The cosmic force that says ‘ask and it shall be given’ has finally responded.

Four, there are terminal points in the market: one when analysts start issuing buy reports in 2017 around the argument that companies appear cheap based on their FY20 earnings and the other when everyone goes silent when they appear cheap based on their FY18 earnings with all growth of FY19 overlooked (we might have already have got there).

Five, during the course of the mid-cap boom across the last 18 months, everyone quietly nodded that this was being driven by unprecedented liquidity coming from domestic retail funds (through mutual fund SIPs), inspiring that same dangerous argument: "It is different this time". It is amazing how gravity gets a word in after the noise of the market has subsided.

Six, the market is marching to the sound of a different drummer (not fundamentals): it strengthened when there were hardly any earnings to show and it declined when earnings are gradually reviving — just the kind of moral victory to make even second-rate technical analysts thump their tables with conviction.

Seven, this could be the beginning of the return to value picking — a preference to buy into stocks at mid-level single-digit retrospective PEs (both!) with moderate forward-looking growth as opposed to buying into 20 and 30 PE stocks because they would keep growing at 20 per cent compounded.

Eight, it would be an interesting time managing divergent perspectives — bullish about the country (this is not a political statement) on the one hand and conservative about the pricing of its small-cap and mid-cap prospects.

Nine, it would be consoling for the bereaved to know that such meltdowns do happen once every few years; the one memory that stands out is after the legendary October 1987 crash on Wall Street, some of the best investors were doing what others were not: buying.

Ten, it would be interesting to see if brokerages put out their best mid-cap buy list following the correction as their validation that Indian equities are still the best investable class and mid-caps their best investable segment (wonder how many will?).

Eleven, the free fall (maybe on an after-thought one should call it a ‘correction’ in long-term investing interests) emphasises that most of us know when to buy; few know when to sell.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed