Last few trading sessions have been brutal for the markets, esp. for small and midcaps. Meltdown could be an understatement. If anyone thought it was a perfect storm for small and midcaps in July/early Aug when confluence of negative factors like mutual fund rationalization, ASM, PMS selling, EM outflows, Rupee fall etc. came together, sadly they didn’t know that worse was coming in Sep/Oct.
Rewinding back to July, market, in a similar scare, punished lot of stocks in the broader space leaving few places for hiding for investors. Back then, large caps were spared and the damage was limited to small and midcap space. But in the current one, markets participants couldn’t hope for such a selective slump. Damage has been inflicted across the board barring IT and Pharma. Even high quality financials where people could hide in the earlier fall weren’t left out. NBFCs, the erstwhile haloed sector, took the worst hit.
As if the heart-burns from crude and rupee were not enough, ILFS debacle descended from nowhere to conspire a deadly blow to the markets. RBI’s no to extension to Yes bank CMD couldn’t have been more ill-timed. When credit markets at the short-end froze on some mutual funds attempt to desperately clear short-term papers (CPs) to meet the redemption pressure in their liquid funds (on fears of their exposure to ill-fated ILFS), hell broke loose and set off a vicious slide in stocks across the board.
Credit markets may look sophisticated. But, at the end of the day, it’s most vital component is also most ephemeral i.e. trust and confidence. When trust erodes, system freezes up. When such things happen, a simple liquidity issues can lead to solvency issues. Fears of such outrageous outcome (driven partly by rumors by vested interests of course) took a ferocious proportion to inflict a serious dent to confidence in the equity markets. Traders with big losses in stock futures and options had to resort to indiscriminate selling in the broader cash markets (even quality names in and beyond small and midcaps) to cover the margin calls. This led to panic in the small and midcaps with stocks crashing by 30 to 40% in few trading sessions. Normally, such indiscriminate selling happens during last leg in so called “capitulation” phase, post which market usually finds bottom. If what happened this week is not capitulation, one would dread to think what will it be? Assuming this is capitulation, with weaker hands completely out, one can now sigh a relief that we are closer to the bottom, if not bottom itself.
So much has changed in one year. Last year, every small cap was sensationalized as hidden gem irrespective of the underlying quality. In stark reversal now, every small cap is indiscriminately avoided as a hidden worm. Seasoned investors know that this is precisely when the opportunities arise multifold. No better time for selective stock picking and accumulation esp. in the small and midcaps.
Market has moved from “Buy-on-dips”(March Quarter) to “sell-on-rallies”(June Quarter) and then further to “sell-on-dips” now, This is usually the time market capitulates and forms the bottom, going by the wisdom of earlier cycles. Also this phase usually turns out to be a fat-pitch for turning aggressive on deployment/investment.
Happy Value Investing!!