Hidden gems to hidden worms – what a quick change of sentiments in the small and midcaps space. New breed of stock geniuses miraculously surfacing in the last few months in the social & mainstream media with their instant multi-baggers suggested simmering froth in small and micro-caps. With the bubble popping out in this space ( going by deep cuts in ongoing trading sessions), there is no hiding place for these new micro-cap masters.
Classical fear cycle is on play in this space. It is increasingly possible that the fear cycle can feed on itself to wreck the markets into manic meltdown. More so, when the commentary and narratives in the mainstream business media fuel such a frenzy by feeding malicious mis-information in a magnified manner. Look at how perennial bears mysteriously appear in the mainstream channels with their over dose of pessimism just when things turn tricky. Programs like “crystal ball” with sensational Shankar Sharma ( First Global) anchored by cynical Udayan Mukherjee promptly appear in such times to provide lethal bullets to bears, thereby raising risks of domestic redemption cycle.
If this correction morphs into a manic meltdown, what should long-term investor do. They should simply keep their shopping carts ready for the eventual fire sale. India is in such a stage of an economic cycle where interest rates are coming off with moderating inflation and investment cycle just turning. It is one of the bright spots in a relatively weakening global macro. While China’s slowing growth and its management will be a huge overhang for global markets, over time, flows will gush into promising markets for its returns, slowly decoupling from China. India will stand to gain from that decoupling because of its relative advantage.
Investors who need more comfort, can take cues from this brilliant chart on BSE Sensex returns from intra-year lows ( source : JP Morgan) plotted since calendar year 2000. In almost every year, without exception, returns from intra-year lows have been positive and have scaled in double digits in most of the years including the year 2008. That much for market’s sanity. With or without China, overbought markets would always correct and oversold markets would rapidly rally with or without hard landing. Every bull market year has a vicious fall and every bear market year will have virtuous rally. That is the nature of markets. Deciphering too much into Chinese deluge without this basic understanding is akin to missing the woods for the trees.
The key to execution is to conserve and build cushion of cash ( when going is good) to capitalize on correction opportunities that ensue every rally. Fund managers who had anticipated and built cash positions prudently should be rejoicing the emerging mouth watering opportunities in the broader space where bubble has popped out post its recent gravity defying gyrations. Interesting times for bottom up stock picking!
Happy Value Investing!!