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First Global's Shankar Sharma reveals the secret of his preference for small-cap stocks

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Veteran investor Shankar Sharma said he prefers small- cap stocks but clarified that those are a collection of “very bottom-up companies”.

First Global's Shankar Sharma reveals the secret of his preference for small-cap stocks
Veteran investor Shankar Sharma said he prefers small- cap stocks but clarified that those are a collection of “very bottom-up companies”.
“When I say I like small caps, the reality is that I don’t like a small-cap index but 10-15 small caps,” he said in an interview with CNBC-TV18 on Saturday.
Sharma has built a reputation as an ace stock market investor. His company First Global, a global securities house, is known to hunt for opportunities in developed economies such as the US and the UK as well as emerging markets such as Brazil and Russia.
The Indian equity market extended its gains for the sixth straight session on Friday, with the benchmark Sensex rising 246 points on sustained buying across sectors. The 30-share BSE Sensex ended 246.32 points, or 0.63 per cent, higher at 39,298.38.
Despite his affinity for small caps, Sharma said the past 18-19 months have been obviously very brutal for such stocks and as a result, the sentiment on small caps have become extremely negative.
“If you see a revival in the market on a technical basis — even if not on a fundamental basis — even on a high beta end of the market, it usually does well.”
What is the high beta end of the market? It is obviously small caps because if you go back to 2008 that was a cataclysmic year for equities in India and globally, he said. “After that if you look at the performance of small-cap index relative to the Nifty, it just was a secular downturn until 2013. So for five years, people did not want to hear about small caps.”
But from 2013, the bull market in small caps started and these stocks beat the Nifty handily over the next four years, according to him.
Sharma said now the sentiment has reverted to “complete negativity” because of “the big economic crisis in India”. “When you have such situations, there is aversion to any kind of small caps.”
One thing about small caps, Sharma said, is that they can collapse without warning and they can rally without warning. "If you look at technicals for example large caps will make move after making formations whether on the top or on the bottom. It is fairly easy to figure out that this is a topping out situation or this is a bottoming out situation in large caps. But in small caps, it can be a vertical fall or a vertical rally with no formations, no chart formations, nothing at all."
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