No end to pain for midcaps, smallcaps; but be selective

By DK Aggarwal

Over the past few months, Indian stock markets have slipped from their earlier buoyant levels. They have been impacted by a host of domestic issues as well as global headwinds such as an uncertain trade backdrop, weak global growth outlook and Fed's rate trajectory, to name a few.

A spike in US bond yields and strengthening US dollar have led to a selloff in emerging markets, including India. Both small and midcaps suffered a double digit drop in 2018 and the trend seems to have continued in 2019 as well. The steep slide in small and midcap stocks came after Sebi announced reclassification of mutual funds.

Notably, valuations in certain pockets of midcaps and smallcaps had been stretched as against largecaps after a marathon rally for nearly five years. Actually, sustained fund flows had pushed up their valuations to unjustifiable levels.

Also, there were issues of corporate governance and resignation of auditors in some companies that hit investor sentiment. Uncertainty surrounding upcoming elections, global geopolitical tensions, a weakening rupee, rising oil prices, the current account deficit, a tumbling rupee, and a rout in NBFC shares are causing the loss of faith in midcap and smallcap stocks.

Mutual funds, especially the midcap ones, which attracted huge inflows earlier, saw widespread redemption pressure.

The interim Budget as well as RBI’s credit policy have supported the Indian market though. The Budget went that extra mile for rural households and the middle class alike, with an aim to increase their disposable income.

With the macro environment becoming more challenging, investors have cut down their exposure to the market while a few smart investors are pouring money into defensive stocks, especially largecaps. Large companies with excess capacity and pricing power are doing very well.

Going ahead, market will continue to remain volatile ahead of the upcoming general elections and investors will equally keep a close watch on US-China trade deal. Though the recent correction has removed some of the froth from the midcap space, investing in quality stocks is worthwhile.

It is essential for investors to revisit their investment strategy and the portfolio they hold. They need to be very selective and should keep a close watch on the business outlook, management quality, inherent profitability and last not the least, valuation comfort.
Chairman & Managing Director,SMC Investments and Advisors Limited