NEWSLETTER DATED: 29-06-2019

NEWSLETTER DATED: 29-06-2019

It’s been almost 18 months now since the fall in mid & small caps commenced & has still not stopped. The darlings of traders are still hitting new lows and there are people who are still averaging it in hope of revival some day. It is true that most of the mid & small caps dint deserve to be at the price they were quoting in Dec-2017/ Jan-2018, however the correction has been really sharp and  today there are no taker even through the valuations seems to be demanding. What has led to this and why the situation is still not improving ?

It is very well said the Liquidity is the Mother of all bull markets.  While the mid and small caps were roaring in September 2017 suddenly SEBI realised that a froth is getting created and they came out with a circular on re-organisation of funds. They wanted the funds to obey some kind of discipline and not buying any stock in any fund haphazardly to create alpha. It’s not that SEBI did not had any regulations earlier but there were loop holes.. This re-organisation defines only top 100 companies by Market cap as large caps, Next 150 as mid-caps & rest all as small caps. This dried the liquidity for small caps and many funds that realised this early sold and switched to mid and large caps. Many schemes got themselves renamed and under that guise got rid of small caps.

https://www.amfiindia.com/Themes/Theme1/downloads/Avg.%20Market%20Capitalization%20of%20listed%20companies%20during%20Jul-Dec%202018.pdf

In India out of total approximately 12 lac cr invested in equity directly or indirectly through Equity and Hybrid Mutual Fund, Large caps have become darling and have attracted close to 75% of total equity AUM (top 25 companies taking 55% share) Mid caps 10-15%, leaving only 5-10% to small caps now (lions share taken by top 250 small cap companies). Money also chases performance so additional money is also coming in blue chip, large cap and large & mid-cap funds. HNI category has been badly hit in last 2 years, 1^st in Equity & now in debt. This can very well explain why only 20/25 stocks are moving up.

It is pertinent to note that, If we list the top 1250 small cap companies the value of Institution holding  in them has come down from 4.7 lac cr to 2.9 lac cr as of june 19. This is the result of re-organisation & to some extent fall in prices of shares, since the net selling by DII’s in equity during last 18 mts is just 12000 cr. Under such circumstances I am sure that not many small cap stocks will not come to their new highs but definitely alpha generation is possible. While liquidity has been major reason for the fall in small & mid-caps we will put a great emphasis on liquidity return to take a big buy call on small caps. Though many multicap funds are launching but they are benchmarked, against NSE 250, so again chance for small cap move is low , however if & when a big small & mid-cap fund is launched that could spark rise for this sector of the market as well. This surely does not rule out outperformance by few exceptional.

 TABLE GIVING AUM FOR VARIOUS EQUITY FUNDS:

                                            - CA JAYESH GANDHI

 Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.