In the long run equity is considered as the best class of investment. And particularly small and midcap sectors are known to wealth enhancer contributing many a more multibaggers from this space. Indian market in midcaps started its bull race after 2014 when the Narendra Modi government took charge at the Centre driven by positive investor sentiments with massive inflows into local mutual fund portfolios. The institutional inflows were diverted into small and midcap due to lack of largecap options and the lucrative returns opportunity in this space.
The bull continued till the year 2017 taking the valuation to a peak quoting at an astronomically high price-to-earnings (P/E) ratio, as ?the midcap index was at 50 times and smallcap index was at 100 times, which is difficult to sustainable in a difficult macro environment. Both small and midcap indices produced many multi-bagger stocks in 2017 but the New Year has started with its own set of challenges for the broader market.
A lot has changed since starting of the year 2018 and the small and midcap space seems to be losing momentum. In the smallcap space as 80 percent of stocks in the BSE Smallcap index posted negative return so far in 2018 including some major down trend in some stocks such as Gitanjali Gems (down 92 percent), Diamond Power (down 87 percent), Electrosteels Steels (down 81 percent), Orient Paper (down 75 percent) and SRS Real Infrastructure (down 80 percent). In 2018, 75 percent stocks in the BSE Midcap index delivered negative returns. The BSE Midcap index and BSE Smallcap index has plunged over 12 percent and 14 percent in 2018, respectively.
Source: Moneycontrol
The sharp fall in the small and midcap sectors contributed by many factors such as persistent selling by foreign investors and institutional investors, unsustainable high valuation, decreasing rupee value against dollar, a sharp increase the crude prices, uncertain and many negative global cues including geopolitical concerns and repositioning its holdings by mutual fund portfolios as classification of mutual funds by the Securities and Exchange Board of India (Sebi)
Now most of the brokerage houses and experts advise to focus on largecaps from small and midcap limit the exposure to not more than 20-30% in the small and midcap space as the broad indices has a positive move while the smallcap space has lost around 15% during this year.
Now most obvious question is what should an investor do?
Like every industry the stock market has also a cycle of ups and down. And more particularly small and midcap face the hit first in a down trend. If you are long term investors it?s time to monetise form this down turn, if you are already suffering from loss it?s time to average your cost. Also a wise investors always find opportunity when everyone is selling. But be cautious in choosing particular stocks and exit not-performing companies and move into ones with better performance and quality management.
In near term the market may be move in a sideline but in long term there must be a cycle when market will regain its momentum and investors who dared to take the risk in mid and smallcap stocks find their portfolio in a much better state than those investing in big stocks.