From midcap to mudcap

Our markets are driven only by FIIs —their buying and selling

Recently, the Securities and Exchange Board of India identified a list of 2,000 companies as ‘illiquid’ stocks. It is a mix of good, bad and great companies. These companies would fall under either ‘midcap’ or ‘smallcap’ stocks, and are generally the focus of attention for media, analysts and punters. In good times, the prices of these stocks exhibit a strong upward move. Alas, when it’s time for selling, the bottom seems to fall out of these stocks. Many could lose 90 per cent of their price. And, these kind of wild movements are possible without significant changes in the underlying company fundamentals.

It is clearly a structural issue. Foreign institutional investors (FIIs) and domestic institutions are engaged in playing the largecaps, while the smallcaps are at the mercy of price-fixers and manipulators. The breadth of participation has been gradually thinning, as the number of retail investors in secondary markets is declining. It is evident that our markets are driven by only FIIs —their buying and selling has been the prime engine. So, our market is a kind of a one-way street. If FIIs are selling, the market dips fast and vice versa. The largecap stocks do not fall as hard as the small counters, which seem to generally hit circuits in either direction.

Over the last five-odd quarters, the FII buying has helped the markets to recover from its lows of sub-10,000. Suddenly, at some point, the euphoria of India seems to have hit a blimp. Our inflation is clearly a structural one and unless the supply improves, it will persist. So, a tempering of growth plus a slowdown in corporate earnings means the FIIs have perhaps taken a pause. The Indian market needs buyers every day. On days a buyer does not come, the market falls. We simply do not have a category other than FIIs, and some insurance money that comes by selling unit-linked insurance plans.

Small- and medium-sized companies are a minefield for the investor. Unless there is active pumping and dumping, I cannot fathom why most stocks from this bucket should have any investor’s interest at all. Clearly, the risks are high. However, one can see opportunities if willing to take high risks. Interestingly, one can see that most multinational company counters held on in this corrective downward movement (which may not be over). Most midcap companies have huge management risks and, personally, this is the real speculative component of the market. No one can bet which promoter will show how much profit in any given year. If investors have a compulsion to buy midcap stocks, it is safer to put it into a midcap fund. Even in midcaps, it is still a play on growth and not on value. Prices have not fallen to that extent. Do not get taken in by steep price falls and assume that past high prices will happen again. Do your homework.

The author is an independent analyst