We are in the middle of the year and usually, the temperature rises upwards of 40 degrees in many parts of the country. Something similar is happening to the portfolio of many investors as carnage spreads across mid & smallcaps with some losing about 50% of their value.
The S&P BSE Smallcap index plunged 7.4% compared to 3.6% slide in the S&P BSE Midcap index and 0.3% fall in the S&P BSE Sensex in June or just 19 trading sessions.
As many as 682 stocks in the S&P BSE Smallcap index gave negative returns in June led by losses in Gitanjali Gems (down 51%), Arrow Greentech (down 50%), Kwality (down 50%), KSK Energy (down 48%), Virtual Global (down 41%), and Deep Industries (down 41.31%).
As many as 286 stocks in the Smallcap index hit a fresh 52-week low including prominent names like JBF Industries, Gammon, Punj Lloyd, Asian Granito, SRS Real Infra, ICRA, Dalmia Bharat, Care Ratings, BEML, JK Cements, Motilal Oswal etc., among others.
The carnage was equally strong in the midcap space. As many as 17 stocks in the S&P BSE Midcap index lost in double digits which include names like Reliance Communications (down 28%), IDBI Bank (down 22%), JSW Energy (down 21%), Adani Power (down 19%), Torrent Power (down 15.8%) etc., among others.
Stretched valuations, falling rupee, relentless selling by FIIs, low earnings growth along with the rise in the cost of capital are some of the factors which are weighing on the small and midcap space.
The volatility is likely to continue and midcaps are vulnerable at current levels which are likely to stay in that state for some more time thanks to excess valuations, rising cost of capital and global tensions.
“Cost of capital will remain a concern for the next 2-3 years as the RBI is likely to hike rates 2-3 times a year. Earnings growth will have to do all the heavy lifting; hence, investors should be cautious of multiples,” Bharat Iyer, managing director, JP Morgan highlighted in an interview with CNBC-TV18.
Commenting on the midcaps and which stocks to buy, Iyer said that investors should look at quality names in the midcap space.
“We feel that earnings are going to compound in the 2-3 years by over 15-20%. And, there are companies which could see that kind of compounding in earnings and any correction in those could be used as a buying opportunity,” he said.
On a year-to-date (YTD) basis quality stocks have declined lesser than the relatively fewer quality names – a reversal from the last year. Amid the carnage, high-quality names, especially within mid-caps, haven’t corrected that much, suggest experts.
“Whilst valuations of small caps and mid-caps have reduced, we also note sharp downward revisions to earnings in the small-cap and mid-cap space, keeping valuations punchy,” Nitin Bhasin, managing director & head of research at Ambit Capital told Moneycontrol.
“Rather than focusing on stocks which have declined sharply and optically offering value or bargain, we advise investors to hunt for quality businesses which are investing for building competitive advantages for long-term growth irrespective of the near-term business environment,” he said.
Nilesh Shah, managing director, Kotak AMC said the valuations remain a key concern for smallcaps. Most of the small and even microcap names were trading at valuations higher than largecaps. Based on the last year performance, amateur money chased these stocks which took the prices at levels away from fundamentals.
Going forward, we thing momentum driven small, mini and microcap have still room to go down but some of the quality mid & smallcaps will start making a process of bottoming out in the next 60 days which might turn out to be attractive buys, he said.
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