Mid-and small-cap stocks have taken a beating thus far in calendar year 2018 (CY18). The S&P BSE Mid-cap and S&P BSE Small-cap indices have lost nearly 15 per cent and 19 per cent respectively, as compared to 7 per cent rise in the S&P BSE Sensex till July 20. The Nifty Small-cap 100 index hit a 52-week low of 6,926.80 on July 19, after a sharp decline in market values of Jet Airways (India), PVR and Manpasand Beverages.
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The fall in both these indices comes after a sharp rally in CY17, where they surged a huge 52 per cent and 64 respectively, outperforming the S&P BSE Sensex and the Nifty50 that moved up around 30 per cent each.
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The fall in individual stocks in the small-cap segment has been much sharper. Kwality, JBF Industries, KSK Energy Ventures, PC Jeweller, GTL Infra and IVRCL, for instance, have slipped 74 per cent – 89 per cent on a year-to-date basis (YTD) till July 20, ACE Equity data shows.
Analysts attribute the underperformance in these two segments to a sharp rise in crude oil prices, a hike in key rates by the Reserve Bank of India (RBI) and trade wars triggered due to protectionist policies.
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Also, SEBI mandate on Mutual Funds (MF) that they have to be true to schemes’ stated objective in so far as investment in stocks across various market capitalisation in concerned led to some selling from MFs in mid/small cap companies.
That apart, auditor’s resignations, Nirav Modi scam and Additional Surveillance measures (ASM) imposed by exchanges further dampened sentiments resulting in negative breadth for the broader markets.
“Two types of bear markets: fundamental & technical. Fundamentals in small caps are intact. So what’s caused the meltdown? Technical factors i.e. trading curbs, hence low liquidity, hence forced selling into illiquidity, leading to a domino effect collapse of the entire segment,” Shankar Sharma, vice chairman and joint managing director at First Global tweeted on Monday.
Two types of bear markets: fundamental & technical. Fundamentals in small caps are intact. So what's caused the meltdown?Technical factors ie, trading curbs, hence low liquidity, hence forced selling into illiquidity, leading to a domino effect collapse on entire segment— Shankar Sharma (@1shankarsharma) July 23, 2018
Analysts remain bullish on the road ahead for the mid-and small-cap segments and suggest investors use the recent correction to buy from a long-term perspective.
“Considering the opportunity for growth coming back due to progressive reforms and low-earnings base, the delta swing in earnings may be higher in Midcaps over the next 12-24 months, making them reasonably priced Vs large caps if you have a two – three year investment horizon,” said Ajay Bodke, CEO & Chief Portfolio Manager(PMS) at Prabhudas Lilladher in a recent note.
Adding: “This is precisely the opportunity for buying into mid/small-cap space as a result of attractive valuations versus their long-term historical valuation multiples. The one-year forward multiple for Midcap100 index has corrected from 23x to 19.9x in the current fall and is now trading at a mere 5 – 8 per cent premium to large caps versus 28 per cent premium at the start of the year.”
G Chokkalingam, founder and managing director at Equinomics Research suggests investors use this opportunity to accumulate stocks like NESCO, Karnataka Bank, South Indian Bank, International Paper, Bal Pharma, Oberoi Realty, Bombay Burmah, Jay Bharat Maruti, Sutlej Textiles, HPCL, SML-Isuzu, Vindhya Telelink, Cyient and INEOS Styrolution.