Is Midcap/Smallcap Correction over?Can Value Buying emerge in 2019 in Midcap/Smallcap?

🔷️FROM PAST 19 MONTHS MIDCAP & SMALLCAPS HAVE SEEN LOTS OF VALUE EROSION.

🔷️ STEP BY STEP KILLING & VALUE EROISION IN MIDCAP & SMALLCAP AS MANY DECSION BY GOVERNMENT EFFECTING IT.

TOP SIX REASONS :

1️⃣Long Term Capital Gain Tax : In Union Budget 2018-19, Finance Minister Arun Jaitley’s announcement to tax LTCG( Long Term Capital Gain Tax) stunned both markets and investors. The Finance Minister proposed to tax LTCG exceeding Rs 1 Lakh at the rate of 10% without allowing the benefit of any indexation. Imposition of Long term capital gains tax while keeping STT intact has resulted in double taxation, this has impacted the overall participation in Indian capital markets, by domestic as well as foreign investors.

Earlier, the definition of what is a Large Cap and what is mid cap and what is small cap was not defined by SEBI. So fund houses used to pick and choose whatever they wished depending on the in-house definition of market caps or their convenience!

2️⃣SEBI Mutual Fund Re-Categorisation: Nearly everyone can agree that mid and small caps were rallying uncharacteristically and the prices were being built up without actual fundamental backing for most of FY18. However, SEBI’s new rules for mutual funds acted like the trigger point for the bubble to burst. In October 2017, SEBI mandated mutual funds to group their equity schemes under large, mid and small caps based on market cap of the stocks the scheme has invested in.

For instance, a Large cap scheme should have minimum 80% investment in large caps and a mid cap fund should have at least 65% of its assets in mid caps. This also required managers of large and mid cap funds to stick mainly to the top 250 stocks in the market.

This forced active funds to trim their portfolio weights in such stocks.

3️⃣Corporate Governance Concerns: Adding to the woes of mid and small cap stocks were corporate governance issues coming up in individual stocks. These problems were contained not only to stocks like PC Jewellers,Infibeam and Vakrangee but also to darlings of stock markets like Infosys, ICICI Bank,
Yes Bank, DHFL among others.

However, mid cap and small cap category of stocks were the worst hit, with investors pulling no stops while selling off their holdings in these stocks. Bad governance in a few stocks definitely destroyed the value of majority of stocks in this category.

4️⃣Additional Surveillance Measures (ASM):SEBI introduced ASM in a bid to safeguard investors from excessive volatility in individual stocks. Under ASM, stock exchanges released a list of 109 stocks on 31st May’18 on which additional trading curbs were imposed. Liquidity in stocks which were put under ASM plunged drastically along with the decline in share prices. Stocks under ASM are subject to 100% upfront margins and 5% circuit limits, these curbs prompted traders to sell their holdings in these stocks due to immediate margin requirement triggering crash in stock prices.

5️⃣ILFS Default & Liquidity Crisis:

NBFCs raise short-term loans of between three and six months duration, using Commercial Papers (CPs). On the other hand, the businesses they lend to (home loans,commercial purpose loans, vehicle loans etc.) are long-term ones. This is referred to as asset-liability mismatch.

To maintain their funding, NBFCs must keep issuing CPs at regular intervals and roll over earlier loans. However since the IL&FS crisis erupted, banks have been averse to lending to the NBFC sector, which has put them in a tight spot. Amidst all this, there were series of downgrades of NBFCs by
credit rating agencies which further dented market sentiments.

6️⃣Red Alert Companies with Pledged Shares:

The fear around companies with high pledged holding began after promoter of Essel Group failed to bring fresh shares as collateral to make up for the slump in prices of the group stocks. Later, the shares of ADAG companies, Suzlon, Jain Irrigation, Cox & Kings witnessed heavy selling as some lenders dumped their stock in open market due to unbearable debt and default on payments.

Institutions wish to stay away from companies where the promoter has huge borrowings against the shares as there is fear that these companies are in a vulnerable position. Banking & financial stocks like Yes Bank and DHFL continue to hit new lows on fears of default and contagion risks.

🔷️MIDCAP INDEX HAD CORRECTED ALMOST 27.5% FROM HIGHS OF 21840 WHICH WAS SEEN ON 15th JAN 2018 & LOW OF 15803 WHICH WAS SEEN ON 9th OCT 2018.CURRENTLY MIDCAP INDEX IS TRADING AT 17100 LEVELS ALMOST 21.5% DOWN FROM ITS HIGH.

🔷️EVEN SMALLCAP INDEX HAS CORRECTED ALMOST 41.5% FROM HIGHS OF 9656 WHICH WAS SEEN ON 15th JAN 2018 & LOW OF 5660 WHICH WAS SEEN ON 18th FEB 2019.CURRENTLY SMALLCAP INDEX IS TRADING AT 6070 LEVELS ALMOST 37% DOWM FROM ITS HIGH.

SOMETHING BIG CAN HAPPEN ON INDEX FRONT IF NIFTY SLIPS BELOW 11400 LEVELS & THERE ARE HIGH CHANCES OF MIDCAP & SMALL CAP INDEX TO CORRECT TILL 15000 & 5250 LEVELS IF NIFTY TANKS BELOW 11400 LEVELS.

🔷️ONE SHOULD EXPECT GROWTH & RALLY ONLY IN SECOND HALF OF 2020 OR 2021 AS OF NOW.

DISC – All views expressed are personal and only for Educational and study purpose only. Consult your financial advisor before investing or taking any position based on above article.

DISC – All views expressed are personal and only for Educational and study purpose only. Consult your financial advisor before investing or taking any position based on above article.

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