Published On : Jan 22, 2020

By Rahul Agarwal (The author is Director at Wealth Discovery/EZ Wealth.)

Going forward, the beaten down stocks in all spaces especially in the midcap and smallcap domain will be in a position to generate healthy returns.

Year 2019 was an exceptional year for the Indian equity markets where the benchmark indices continued to scale new highs but the exuberance was not broad-based. Several reasons can be attributed to this kind of price action, the primary being the global geopolitical uncertainty that kept the global equity market on the tenterhooks.

US-China trade war escalation was primarily responsible for triggering an equity risk-off mode where investors chose safety over returns and hence select bluechips were the major beneficiary of this kind of investor behaviour.

If one looks at the absolute returns for the benchmarks viz. Sensex and Nifty, a return of 14 percent and 12 percent, respectively, is very healthy, however, digging deeper even within the benchmarks the returns were highly asymmetric and concentrated into few largecap stocks.

Few index heavy-weights, such as ICICI Bank, Reliance Industries, Kotak Mahindra Bank, HDFC and HDFC Bank, with weightage of up to 11 percent in the Nifty50 index, stretched the index to its all-time highs.

While looking at the S&P BSE Midcap index returns for 2019, one gets the feeling that these indices where mostly flat for the year, however that would be a fallacious conclusion because there was a severe value destruction in the midcap, smallcap space in 2019.

Some of the stocks which had significant retail participation lost up to 80 percent of their valuation in 2019, towards the end of the year there was some recovery but on an overall basis investors lost a lot of money in the midcap and smallcap space.

A closer look at individual stocks within the midcap and smallcap space reveals that the asymmetry of returns that was visible in the largecap space had percolated into the stocks in this space too.

The price action in some of the good quality stocks suggest that although on an overall basis there was a flight to safety in this space too where select stocks with superior fundamentals were rewarded handsomely by the investors. The range of returns in this space for stocks with exceptional returns was between 300 percent and 100 percent.

Some stocks with exceptional returns were beneficiary of a low base effect, for e.g. Reliance Naval Engineering on an absolute basis was up by 300 percent where the stock price moved from Rs 0.70 to Rs 3.02, whereas a stock like MTNL which gained almost 200 percent was up due to government policy announcement in regards to the resuscitation of sick telecom PSU’s.

Some stocks such as IndiaBulls real estate were beneficiaries of some positive developments on alleged fraud which was later found to be baseless. It should however be amply clear that on an overall basis the story in this space was individual stock specific and the superlative returns were independent of the overall market trajectory which was lower.

Going forward, it is widely expected that the Indian economy has bottomed out and the positive effects of the economic turnaround would lead to healthy broad-based rally and the beaten down stocks in all spaces especially in the midcap and smallcap domain will be in a position to generate healthy returns.

From an overall valuation perspective, the benchmarks are trading at a premium and in coming days value hunting would lead to superlative stocks with strong management, simpler business models and consistent earnings growth outperforming the overall markets.

Investors with some risk-appetite and a penchant to stay invested for longer term would be well served if they are able to pick fundamentally sound stocks in the midcap and smallcap space.

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